Waiting for a fair wind

Mint Road has eased up on loans being given to shadow banks, but risks continue and smooth sailing for unsecured credit is still some time away, reports RAGHU MOHAN

- RAGHU MOHAN

Towards the end of February, the Reserve Bank of India (RBI) restored the risk weighting on banks loans to non-banking financial companies (NBFCs; including to microfinance institutions, or MFIs) to 100—back to its November 2023 position—from 125. It is only a partial relief though.

"Higher risk weighting on unsecured lending continues to be in place while the same on bank funding to NBFCs has been done away with. This is a positive step by RBI," says Rajiv Sabharwal, managing director (MD) and chief executive officer (CEO), Tata Capital.

In effect, the banking regulator has only partly restored the measures it took in November 2023.

Consumer credit exposures of commercial banks and NBFCs (excluding housing, education, vehicle loans and loans secured by gold and gold jewellery) still attract a weighting of 125 percent.

This tells you how the banking regulator is reading the plot: it wants to support NBFCs with liquidity but is staying firm on its concerns around unsecured credit risk. Over the past few years, unsecured loans have grown at a compounded annual rate of 22-25 per cent, fuelling consumption, but also increasing systemic risk.

The latest move was speculated to be in the works from the day Sanjay Malhotra took charge at Mint Road. It was held that Malhotra's predecessor, Shaktikanta Das, may have gone overboard in pushing up the amount of capital that banks have to set aside on their exposures to their shadow banking cousins. Even as it forced the latter to reduce their reliance on bank lines of credit which had spiked; and broaden their sources of funding. Read together, a view gained ground that NBFCs had been starved of funding and this was affecting demand in the economy.