Governor Shaktikanta Das of the Reserve Bank of India (RBI) emphasized the importance of identifying and addressing potential financial crises at an early stage. He stated that failure to take action in the area of unsecured lending could have led to more significant problems. Speaking at an international conference on financial resilience held at the RBI’s College of Supervisors in Mumbai, Mr. Das highlighted the positive impact of the RBI’s actions in November 2023 to curb the growth of riskier unsecured lending portfolios.
The decision to impose restrictions on unsecured lending was based on concerns that the credit market could face potential issues due to the rapid growth in this type of lending. While the headline indicators of the overall economy appeared favorable, there was clear evidence of a weakening in underwriting standards, inadequate appraisals, and a trend among some lenders to engage in unsecured lending without proper diligence. Recognizing the potential vulnerabilities that could arise if left unaddressed, the RBI decided to take preemptive measures to slow down credit growth.
Governor Das expressed satisfaction with the results of the RBI’s actions, as the growth in unsecured lending has indeed slowed down. The growth rate of credit card portfolios decreased from 30% to 23% following the RBI’s intervention, while bank lending to Non-Banking Finance Companies (NBFC) experienced a decline from 29% to 18%. To achieve this outcome, the RBI increased risk weights on unsecured lending and exposure to NBFCs, which required banks to allocate larger amounts of capital against these assets.
Governor Das emphasized the RBI’s proactive approach in ensuring systemic stability. While he acknowledged that it is not feasible to detect every potential crisis, the RBI strives to be vigilant and identify any emerging risks. Safeguarding financial stability is a top priority for the central bank.
In addition to these measures, the RBI has intensified its onsite supervision of credit information companies, conducting annual and thorough assessments to ensure effective oversight of the credit reporting industry.
Overall, the RBI’s efforts to address the risks associated with unsecured lending demonstrate its commitment to maintaining a stable and resilient financial system in India.