Will RBI follow up on November action on personal loans?

As on October 20, personal loan growth stood at 30 percent, with credit card outstanding and other personal loans up 28 percent and 25 percent, respectively.

Could the Reserve Bank of India (RBI) be mulling over more restrictions to curb the growth in personal loans? There is an expectation in some quarters that the Indian central bank might take further steps to stem the huge growth in this segment due to the risks.

At the last monetary policy decision announcement, on October 6, RBI Governor Shaktikanta Das raised his eyebrows at the surge seen in some components of consumer loans. Just over a month later, the RBI acted, announcing a series of steps to clamp down on them.

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The RBI began its three-day Monetary Policy Committee meeting earlier today on December 6. With Das set to take centre-stage again at 10am on December 8, could a second round of measures follow soon? While some believe they are in the offing, it is not clear when.

“All these measures, and the recent speech by the RBI Governor, delivered at the FIBAC 2023 Conference on November 22, are a reminder of the unsustainable growth in India’s personal debt during the past 24-30 months,” according to Motilal Oswal Financial Services’ economists Nikhil Gupta and Tanisha Ladha.

“So, will these measures moderate unsecured consumer credit growth in the country, as per the RBI intentions? We do not think so and that’s why we believe this is just the initial step and anticipate the regulator to introduce progressively stricter measures in the next few months or quarters, widening their scope,” they added.

As on October 20, personal loan growth stood at 30 percent, with credit card outstanding and other personal loans – the focus of RBI’s measures – higher by 28 percent and 25 percent, respectively, compared to same time a year ago.

The times, they are a-changin’

That consumer credit is rising quickly is indisputable. The reasons behind the rise are not as clear and could even include the deteriorating balance sheets of households. While economists and policymakers debate the exact contours of the changing asset-liability position of Indian consumers, one must also take a look at the supply-side.

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“The advent of FinTech has undeniably streamlined lending processes, prioritising speed and convenience,” Rohit Arora, Chief Executive Officer and Co-founder of New York-based online lending platform Biz2X.

Add in changes in consumer behavior and it makes for a heady cocktail.

“A perceptible shift in mindset is particularly evident among the younger demographic, who now embrace the idea of borrowing for consumption, contrasting significantly with perspectives from the past decade,” ratings agency CareEdge said in a report on November 24.

Also Read: RBI’s post-Diwali retail loan dampener – will higher risk weights hurt spending?

But for Arora of Biz2X, the problem is one of how loans are approved.

“The concern lies in algorithmic decision-making potentially overlooking nuanced financial situations. Striking a balance between efficiency and discernment is pivotal, ensuring responsible and inclusive tech-based lending,” he said.

Bankers, however, don’t think more measures are on their way. So far, the RBI has only increased risk weights and asked banks and non-bank finance companies (NBFCs) to review their exposure limits and ensure there are board-approved caps on various sub-segments of consumer credit to manage risk.

“I think whatever had to be done has been done. We don’t expect the RBI to announce more measures,” a top executive of a leading Indian bank said on the condition of anonymity.

Maybe the RBI won’t announce anything further on December 8 and give itself some time to see the impact of its November 16 actions. But if the rot runs deeper, the Indian central bank will not hesitate to take the next set of steps.