RBI Rules Around Unsecured Loans Cautionary In Nature, Says CRISIL's Ajit Velonie

The Reserve Bank of India’s (RBI’s) recent measures to curb the growth of unsecured loans disbursed by non-banking finance companies (NBFCs) is cautionary in nature and unsecured personal loans constitute a very small portion of overall NBFC lending, Ajit Velonie, senior director, CRISIL Ratings, told The Core. 

“If you look at the recent reports put out by the regulator (RBI), the financial stability report in the speech made by the governor (Shaktikanta Das) recently, he also said that it's more an element of caution to ensure that the growth is not at the ‘irrational exuberance.’ That's a term that was used. So I think it's more what we would say is an element of caution,” Velonie said.

For a while now, the RBI has been repeatedly flagging small-ticket unsecured personal loans disbursed by NBFCs. To address the supply side issue, the RBI last week increased the risk-weights to 125% from 100% on unsecured personal and consumer durables loans and credit cards by NBFCs. This would make availing these loans expensive for borrowers. RBI has been particularly concerned about NBFCs, which are net borrowers of funds from the financial system and have a large exposure to banks. 

Prevention Better Than Cure

The RBI is keen on taking a precautionary approach to unsecured personal loans by NBFCs. The primary reason is the interconnectedness of the whole lending ecosystem. Banks’ exposure to NBFCs has also been on the rise. The banking system lending to NBFCs in March 2018 was only about Rs five lakh crores which is now more than Rs 14 lakh crore. The fastest-growing segment from a banking sector perspective is loans to NBFCs. Bank loans today constitute about 43% of the resource profile of NBFCs which was about 35% till as recently as March 2021.

“Whenever you find, from a regulatory perspective, any segment where there is a very, very fast, rapid growth. I think it's all an element of caution. And even if you look at the recent reports put out by the regulator and the financial stability report in the speech made by the governor recently, he also said that it's more an element of caution to ensure that the growth is not at the irrational exuberance,” Velonie said.  

The RBI seems to be worried about an impending credit crisis and by weaning NBFCs off bank loans, it is trying to avert contagion in a financial system that is becoming ever more interconnected. A report by Care Ratings reveals that bank loans to NBFCs rose by 35.1% to Rs 14.2 lakh crore in June. 

“I would possibly say it's about being cautious, monitorable. And because you've had a very, very rapid pace of growth, it is to ensure that the growth remains calibrated. And that's the role of the regulator to address systemic risk level,” Velonie said.

Unsecured Lending Within Control

The RBI’s primary concern is reportedly in the sub-Rs 50,000 loan segment, where NBFCs have high exposure. NBFCs have been catering to this low-ticket segment of borrowers through their tie-ups with fintech companies. Any stress at NBFCs will have an impact on the banking sector. 

However, according to Velonie, unsecured loans constitute significantly less proportion of the assets under management (AUMs) of NBFCs. Retail loans as a segment for NBFCs have experienced significant growth, while the industry segment has recorded a decline in market share in the last five years. Velonie said that the health of NBFCs remains strong and with the boom in retail assets, CRISIL expects that in the ongoing fiscal year, it will grow at least 16-18%.

“If you look at the total NBFC AUM pie, unsecured (loans) to be about 12-14% of this. The little more direct impact is to 12-14%. And I think what we see specific on these measures is that this possibly could be a recalibration as we call it of a growth strategy because the segments have grown at a fast pace. Because of that, compared to the 16-18% of fiscal 24, our estimate is that the growth may be moderate, could be a slightly wider range of say, 14-17%,” Ajit Velonie, senior director, CRISIL Ratings, told The Core. 

The total NBFC book amounts to around Rs 27 lakh crore. Of this, home loans constitute 25-27%, vehicle loans around 25-27% and unsecured loans around 12-14% at around Rs 350,000 crore.

Steady Growth

Velonie said that unsecured retail loans are expected to record relatively slower growth as NBFCs would recalibrate their strategies following the recent regulatory measures by the RBI. Going forward, diversification in product offerings and funding profile will be key constituents of their growth strategy. 

About 88% of the AUMs are mostly secured loans like home loans and loans on personal vehicles. In the rest of the NBFC AUM pie, the growth is expected to remain fairly strong. According to Velonie, on both the housing and vehicle loans side, underlying asset sales remain strong and CRISIL is expecting growth in housing loans to be over 13-15% and 17-18% growth in vehicle financing.  

“So overall, 14-17% growth if you look at the coming fiscal too,” Velonie said.