The Reserve Bank of India's decision to reduce risk weight on consumer loans is credit negative as it will 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 Investors Service said on Wednesday.
Earlier on 12 September, the RBI had reduced risk weighting on consumer loans such as personal loans to 100 from 125 per cent. However, credit card receivables were excluded from the list.
The global credit rating agency said within rated banks, HDFC Bank Limited has a higher exposure to the personal loans segment and are thus more vulnerable to the potential rise in asset risk as a result of this development.
According to Moody's, reduction of risk weights would lower the capital requirements and thus the loss absorbing buffer on these loans. The move for reducing risk weights will also encourage banks to further increase their exposure to this cyclical segment at a time when the macro economy is slowing.
"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% over fiscal 2013-2019 far exceeded that of 11% in overall banking system loans over this period, Moody's said in a statement.
The global rating agency said that 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 among 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 as it prompted banks to focus on personal loans for their higher yields, it said.
Referring to India's economy growth that hit six years low of 5 per cent during the June quarter, Moody's said there has been a sharp deceleration in economic and consumption growth in the first quarter of fiscal 2020.
"This raises concern that asset risk on unseasoned personal loans will rise as a result of potential deterioration in household financial conditions," Moody's said.
Edited by Chitranjan Kumar