India’s move on risky loans to hit banks more than economy
India’s central bank is clamping down on risky consumer lending as the economy booms, a move that’s likely to hurt banks but only have a limited impact on growth.
The Reserve Bank of India on Thursday told lenders to set aside more capital for unsecured consumer loans, such as credit cards and small, personal loans.
That type of borrowing had surged more than 25% in the past year, according to Macquarie Group, far higher than growth in consumer incomes, potentially creating a debt trap for borrowers and giving rise to defaults.
The RBI’s measures prompted a selloff in bank stocks on Friday, with analysts saying a rise in borrowing costs will hit profits.
The NSE Nifty Bank Index and S&P BSE Financial Services fell 1.5% and 0.8% respectively.
For the broader economy though, the impact may be more muted, economists said. The RBI’s restrictions don’t apply to loans for housing, cars and other secured borrowing, which makes up more than three-quarters of retail loans.
“This is more a macro-prudential step aimed at making unsecured lending costlier,” said Gaurav Kapur, an economist with IndusInd Bank Ltd. “Demand will be hit, but the impact on overall consumption will be fairly limited.”
Policymakers are trying to strike a balance between growth in the fastest-expanding major economy in the world, and financial stability.
They’re worried that some consumers are taking out more short-term loans to buy phones and TVs than they can afford, and banks will soon be saddled with bad debt.
While unsecured lending has grown more than 20% in the past year, the average monthly income of urban residents in India has increased only 7.5% in nine months to June, according to ICICI Securities Ltd.
Governor Shaktikanta Das and other
