We’d like to curtail consumption-led loans with no clear end use: RBI Dy Governor

• Bank lending to NBFCs was growing at 24-25% y-o-y, whereas the rest of the system was growing at 12-14%.
• Interconnectedness is building in the system and RBI moves intend to address that.
• RBI governor said that its preemptive measures are intended to proactively take action before the bubble bursts.

India’s central bank intends to cut down consumption led-loans given out by banks and shadow banks. Reserve Bank of India’s deputy governor Swaminathan Janakiraman said that its intention behind increased risk weightage on unsecured loans is to cut down growth of loans which do not have a clearly defined end use.

Some segments’ growth within NBFCs are outliers, and the measures taken are to address that. Swaminathan insists that per se, small ticket loans are no risk to the system.

“The loans in the under ₹50,000 segments is less than half a percent of total outstanding. They may be dealing with a lot of people, it’s a segment that cannot pose a great risk to the system,” he said while speaking at the post-monetary policy press conference on Friday.

Last month, RBI asked banks and non-banking financial institutions (NBFCs) to provide more for unsecured loans, under which personal loans are covered. This measure also addresses interconnectedness building in the system where banks are lending to NBFCs.

Bank lending to NBFCs was growing at 24-25% y-o-y, whereas the rest of the system was growing at 12-14%. “Bank lending to NBFCs had to be re-caliberated. The idea is not to deny liquidity or ration the lending,” said Swaminathan.

He also added that the business models of some of these institutions will be re-caliberated along with their growth numbers.

“Risk measure protection and underwriting practices are getting better. It’s too early to comment on the effect it has had. Governance and effectiveness of assurance functions is top of our priority. You will hear more from us on that,” said the deputy governor.

To take action before bubble bursts

The RBI governor Shaktikanta Das also insisted that this move is a preemptive measure to address potential risks. “We don’t wait for the house to catch fire and then act. Our effort is to proactively take action before the bubble bursts,” Das said in his speech.

Apart from keeping policy rates unchanged, the RBI’s rate-setting panel also remained focussed on withdrawal of accommodation. It has also kept its projections on inflation for FY24 unchanged at 5.4%, and also warned that the November print of inflation might come in higher.

Inflation management cannot be on auto-pilot even as the future is expected to be clouded by uncertain food prices. But Das also said that summer of 2022 is behind us.

The RBI also increased its GDP growth projection for FY24 to 7% from 6.5% earlier. “There is growing international confidence in the Indian economy, as we speak to other central bank governors and some large investors. There is confidence from the point of view of investment, quality of Indian products and its service exports,” Das said at the conference.

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