Rating agency Moody's said on Wednesday that Reserve Bank of India's decision to reduce risks weights for consumer loans from 125 per cent to 100 per cent at a time when economy is slowing down was credit negative.
The reduction in risk weights would encourage banks to increase their exposure to this loan segment at a time when credit risks are already increasing from a slowing economy, Moody's said.
Moody's said that the reduction of risk weights would lower the capital requirements and thus the loss absorbing buffer on these loans.
Consumer credit like personal loans have been reporting strong growth in India over the last few years. The segment's compounded annual growth rate (CAGR) of around 22 per cent over fiscal 2013-2019 far exceeded that of 11 per cent in overall banking system loans over this period.
Personal loan growth has been particularly strong among large private sector banks. The strong growth of personal loans in recent years was supported by the yields offered by these unsecured loans which were amongst the highest within retail lending.
A benign credit environment, characterised by relatively low credit costs across all key retail loan segments, was a key driver of this growth. This prompted banks to focus on personal loans for their higher yields.
The move for reducing risk weights will also encourage banks to further increase their exposure to this cyclical segment at a time when the macroeconomy is slowing.
There has been a sharp deceleration in economic and consumption growth in the first quarter of fiscal 2020. The growth in gross domestic product slipped to a multi-year low of 5%, within which private consumption grew only 3.1%.
Such a slow economic growth trend raises concerns that asset risk on unseasoned personal loans will rise as a result of potential deterioration in household financial conditions, Moody's added.