RBI’s warning on exuberant retail lending has deeper dimensions
retail lending is increasingly posing concerns for the banking industry, arising from a potential systemic risk.
The non-mortgage lending growth of banks and NBFCs has been growing at 25-30% YoY, mainly led by credit cards, durables, autos, personal loans, education loans, and others.
A recent RBI research delves into the empirics of retail credit growth and concludes that the quality of retail loan portfolio is healthy across banks, product categories, and borrower risk classes, even as growth continues to surge.
But it warns that some subcategories, mainly credit cards and vehicle loan portfolios, show signs of weakness, and need close monitoring.
The broader message of this study is that there are incipient concerns about rising credit risks from rampant retail lending by banks and NBFCs.
However, the fact that the RBI’s research recommends further regulatory tightening to contain the spillover effect aligns with our fervent alerts on exuberant retail lending.
Considering RBI’s latest study, the announced and prospective regulatory tightening, and our assessment of the economic cycle, the headwinds for the Indian banks and lending industry will likely intensify.
RBI study indicates tightening ahead
RBI’s recent measures to increase risk weights on non-mortgage retail lending and stamping out the evergreening of bad assets by lenders using the AIF route indicates that the regulator is aware of systemic and lender-specific risks, more than what is reported by the lenders.
The RBI study recommends that a) incipient concerns from aggressive retail lending deserve close and continuous monitoring for any undue build-up of stress, b) The regulator could enhance its structural prudential tools using the debt-service
