RBI’s hardening cautionary stand on unsecured lending and its impact on the larger market

economictimes.indiatimes.com:

consumer credit pools of non banking finance companies (NBFCs) is expected to slow down in the current year, given that the Reserve Bank of India has increased the weightage of such loans by 25% across categories, said rating agency ICRA in a note issued today.
Sell down is the act through which the NBFCs that hold these unsecured assets on their books sell them to banks or securitise them in return for liquidity. This helps them liquidate their assets on time and free up cash for further lending.

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In the same note, ICRA said that ‘sell down’ of loans by consumer lending NBFCs stood at Rs 1,150 crore in FY2023. In the first half of the current fiscal year, the amount had already crossed Rs 800 crore, ICRA said.
On November 16, the RBI increased the risk weightages of unsecured credit for NBFCs and banks to 125% from 100% previously. This created a massive flutter in the entire ecosystem, given consumer lending has shot up in recent times.
RBI data shows that in the last two years, credit card outstanding has shot up 64%, while personal loans and consumer durable loans went up 57%.

On November 22, the RBI Governor said that banks need to be careful about relying heavily on technology to underwrite customers, thereby instructing lenders to go slow on consumer credit disbursal.

“Banks and NBFCs need to be careful in relying solely on pre-set algorithms as assumptions based on which the models are operated,” said RBI Governor