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  • Lenders flag rising delinquencies in small ticket unsecured retail loans post RBI caution

    Lenders flag rising delinquencies in small ticket unsecured retail loans post RBI caution

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    A fortnight after RBI cautioned banks against unprecedented growth in unsecured retail loans and asked them to grow “sensibly”, large banks and NBFCs have flagged increased risks and delinquencies in some small-ticket segments.

    As a part of Q2 earnings, ICICI Bank highlighted that market trends and research indicate risk build up and higher defaults in lower ticket loans, especially below ₹50,000 where affordability and repayment ability are constraints.

    Kotak Bank too acknowledged headwinds and higher delinquencies in certain unsecured segments, especially smaller ticket loans, but interim MD Dipak Gupta said the risk-adjusted returns are still “okay”.

    Lenders are continuously monitoring these portfolios and haven’t reached a point of putting the brakes or panicking, he said, adding that while the rate of default is higher than last year, it continues to be below pre-Covid levels.

    Bajaj Finance, the largest retail NBFC, said leverage levels have worsened for the below ₹50,000 ticket portfolio and the company has cut exposure to borrowers with multiple lines of credit of less than ₹50,000 as it reflects imprudence.

    Personal loans up

    Personal loans, including credit cards, grew to 10.7 crore in FY23 from 7 crore in FY22 and 4.5 crore in FY20, led by the less than ₹50,000 and above ₹8 lakh segments, as per an internal analysis by Bajaj Finance. Industry AUM for the segment rose to ₹13.5-lakh crore in FY23 from ₹7.5-lakh crore in FY20.

    Unsecured retail loans accounted for a significant portion of lenders’ fresh slippages in Q2 FY24, however most lenders dismissed any marked concerns given the smaller share of these loans in the total book and the steady rate of collections and recoveries.

    A recent SBI report said unsecured retail loans comprise one-tenth of banks total loans, indicating contained risk at the time. Small-ticket personal loans of below ₹50,000 comprised 2 per cent of banks’ overall personal loans and 0.3 per cent of retail loans as of FY23, according to CIBIL CMI data.

    Corrective action

    Bajaj Finance has reduced exposure to urban unsecured retail loans by 8 per cent and rural loans by 14 per cent. MD Rajeev Jain said the rural B2C segment looked the most vulnerable at the moment and was the only segment where the lender has taken “corrective action” based on the bounce and slippage rates and portfolio efficiency.

    While Kotak Bank will continue its policy of completely providing for unsecured retail loans that are 180 dpd (days past due), RBL Bank said it has accelerated risk mitigation by fully providing for such loans at 120 dpd. This led to the bank providing an ₹48 crore more, in addition to which it also made contingent provisions of ₹252 crore on its microfinance and credit card portfolios.

    Yes Bank said it has strengthened underwriting and is strategically going slower in certain retail segments such as unsecured loans, given the increasing trend of delinquencies, especially in the 30 dpd segment.

    In the October policy, RBI had asked lenders to strengthen their internal risk mechanisms as the “first line of defence” to avoid any future challenges, adding that robust risk management and stronger underwriting standards are the “need of the hour”.

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  • Interest cost for borrowers still below pre-pandemic level: BoB report

    Interest cost for borrowers still below pre-pandemic level: BoB report

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    The cumulative increase of 250 basis points (bps) repo rate by the Reserve Bank of India (RBI) and the reaction of banks in terms of transmission has still not pushed interest cost for borrowers to the pre-pandemic levels, according to a report by Bank of Baroda’s economic research department.

    “While borrowers may view this current cycle as imposing an additional burden, this is because abnormal conditions typified by the pandemic had made interest rates come down to the lowest level. Hence, the present level of rates may be viewed as a correction.

    “…There is still some room for upward movement in weighted average lending rate, which will keep interest costs of borrowers at the pre-pandemic level,” Dipanwita Mazumdar, economist, BoB.

    Also read: Strong global headwinds to keep rates high: RBI Governor

    The economist observed that when the pandemic started in March 2020, there was a dramatic easing in monetary policy, with repo rate hitting record low of 4 per cent. This was also reflected in the Weighted Average Lending rate (WALR), witnessing more than complete pass through in the same period.

    Subsequently, the repo rate has been increased by 250 bps to 6.5 per cent. Both these cycles involved lending rates coming down first and then going up, she said.

    BoB’s analysis shows that interest cost on outstanding loans as of February 2020 (under certain assumptions) got a benefit of ₹61,000 crore in FY21 and a further ₹53,000 crore in FY22 relative to FY21.

    In FY20, based on the WALR, the interest outgo was ₹10.16-lakh crore (applying the the then outstanding WALR of 10.05 per cent) on a sum of ₹101.05-lakh crore (outstanding loans).

    Also read: Monetary policy has to remain extra alert and ready to act: Shaktikanta Das

    “In FY21 the cost came down to ₹9.55-lakh crore and declined further to ₹9.02-lakh crore in FY22. Compared with FY20, the cost was lower by ₹61,000 crore and ₹1.14-lakh crore, respectively. If these two years are combined, the savings in interest costs for borrowers amounted to ₹1.75-lakh crore,” said Mazumdar.

    Rise in interest cost

    In FY23, as interest costs rose, total interest outgo was ₹9.35-lakh crore, which though higher than that in FY22, is much lower than the FY20 cost. Therefore, as the RBI corrected the repo rate towards normal, borrowers were still not worse off compared to pre-pandemic times, opined the Economist.

    She assessed that in FY24, based on assumption of unchanged WALR, the interest cost will go up to ₹9.91-lakh crore, which is again lower than FY20 level by ₹25,000 crore.

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  • Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

    Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

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    The banking sector appears to be well prepared in the current phase of hardening of yields as the timely creation of investment fluctuation reserve (IFR) provides adequate buffers to withstand trading losses, per an article in RBI’s latest monthly bulletin.

    The investment fluctuation reserve (IFR) is created by transferring the gains realised on sale of investments.

    It enables banks to maintain an adequate reserve to protect against increase in yields on their balance sheet in the future.

    In the wake of the guidelines and with falling yields and resultant higher trading profits resulting in higher transfer of funds to IFR, the IFR has reached 2.2 per cent of HFT (held for trading) and AFS (available for sale) portfolio by end-March 2022 at the system level,said RBI officials Radheshyam Verma^ and Rakesh Kumar in the article “Impact of G-Sec Yield Movements on Bank Profitability in India.”

    Also read: Data Focus. Why transmission of repo rate hikes is slower in lending rates?

    Rise in G-sec yields

    However, with sharp rise in G-Sec (Government Security) yields and fall in bond prices in Q1 (April-June) :2022-23, banks recorded treasury losses in their trading book to the tune of 4.9 per cent of their operating profit.

    However, at the system level, SCBs (scheduled commercial banks) managed to maintain their IFR above 2 per cent which reached 2.7 per cent by March 2023.

    As compared to PSBs (public sector banks), PVBs (private sector banks) were more proactive in provisioning towards IFR, the authors said.

    Also read: Bankers’ views on RBI policy

    PVBs crossed 2.0 per cent of their HFT and AFS portfolio in September 2021, while PSBs reached IFR of 2 per cent in March 2022. Despite the hardening of G-Sec yields, PSBs and PVBs were able to manage IFR above 2 per cent.

    “Going forward, strengthening of risk management practices and internal controls by banks remains of paramount importance. Deepening of interest rate derivatives market also assumes significance in mitigating the adverse movements in interest rates on bank portfolios by encouraging the participation of banks for hedging and neutralising large changes in yields,” the RBI officials said.

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  • Discussions on for fintech SRO, framework expected by fiscal-end

    Discussions on for fintech SRO, framework expected by fiscal-end

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    Industry bodies are in discussions with the RBI for a fintech SRO (self-regulatory organisation), and a framework for the same is expected by the end of the current financial year, industry participants told businessline.

    “Indirectly, every association works as an SRO because they set standards and best practices, which members are expected to follow. What’s lacking is enforcement or authorisation by the regulator for them to start taking action if somebody does not follow the norms. That’s the piece that is under discussion with the industry associations and regulators,” said Navin Surya, Chairman of the Fintech Convergence Council and Organizer and Advisory Board Member of GFF 2023.

    The buzz around setting up an SRO has gained ground after both the RBI Governor and Deputy Governor, last week, called for self-regulation among fintechs, and setting up an SRO structure.

    While discussions have been on for a few years, a public communication by the regulator reflects that work on the same is expected to pick up pace, industry officials said.

    Listen: State of the Economy. Can self-regulation help the FinTech sector? 

    “RBI will identify an association to form an SRO and fintechs will have to become members and follow the guidelines. Any fintech that chooses not to be part of the SRO may face a backlash, not just from regulators, but also other industry players. For instance, co-lending partnerships for such entities will eventually become a challenge,” said Anuj Kacker, Executive Committee member, DLAI and Co-founder Freo, adding that it is in the best interest of the fintech industry to self-regulate.

    RBI’s understanding behind the push for an SRO seems to be that because it can’t govern everybody, it will regulate banks and NBFCs, and through them digital lenders and fintechs. An SRO structure will help avoid over-regulation from these entities, and also create an additional layer of supervision and communication, industry players said.

    Also read: Trust required in fintech and banking space: Larsen & Toubro

    “The recognition of SROs by RBI grants us recognition on a formal platform,” said Virender Bisht, Co-Founder & CTO, Niyo, adding that SROs will also help “weed out rogue actors” from the industry.

    However, setting up a fintech SRO is not as easy as in other sectors such as microfinance, which are homogenous and have one type of offering. This is the reason discussions regarding the structure, models, framework and representation, among other issues, are taking longer.

    “There are multiple products and models within payments and lending. Given the number of segments that exist, complexities might arise, but we are working closely to solve all of them and start forming one,” Surya said.

    RBI already has a framework for setting up a payments SRO and is expected to issue one for digital lending and eventually for the overall fintech sector as a whole, sources said, adding that the frameworks will lay down the guidelines for the role and scope of the SROs and what segments and parameters they will cover, as compared to member-driven observations that industry associations follow today.

    “One of the key challenges in self-regulating the fintech sector revolves around achieving a balance between profitability and maintaining a 100 per cent customer-centric approach. The regulator’s role is pivotal here, as it should remain impartial to any interest in driving profits,” said Gaurav Chopra, Founder & CEO of IndiaLends.

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  • RBI DG Sankar calls for fintech SRO to proactively address industry issues

    RBI DG Sankar calls for fintech SRO to proactively address industry issues

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    RBI Deputy Governor T Rabi Sankar, on Tuesday, called for self-regulatory organisations (SROs) in the fintech industry to proactively address issues such as market integrity, conduct, data privacy, cybersecurity, and risk management.

    “As regulators continue to contemplate, implement, and refine regulations for the orderly development of the fintech sector, SROs could play a pivotal role in the fintech industry by promoting responsible practices and maintaining ethical standards,” said Sankar at the Global Fintech Fest 2023.

    These industry-led bodies will help establish guidelines and codes of conduct that foster transparency, fair competition, and consumer protection. Further, they will facilitate collaboration between fintech firms, regulators, and stakeholders, creating a framework for innovation with guardrails, he said, adding that SROs will help build trust among consumers, investors, and regulators.

    “What is different about the recent financial innovations is the speed and scope of such changes making them potentially much more disruptive,” he said, adding that rapid technology changes can outpace regulatory frameworks, thus raising issues about market integrity, consumer protection, data privacy, and fair market practices.

    Fintechs have brought about transformation in the form of increased efficiency, with which financial products and services are delivered and consumed. This has been driven by digitisation of information for easier access, processing and transmission, direct interface between buyers and sellers, borrowers and lenders, and payers and receivers, and democratisation of fast communication channels.

    “Put together, these efficiencies lead to lower cost, quicker transactions and better inclusion. This is clearly a desirable outcome and one that should be actively encouraged and promoted, which is what the focus of policy making and regulation currently is,” Sankar said.

    In turn, traditional financial players are reacting by either internalising innovations to compete with fintechs, or are collaborating with fintechs through one-to-one partnerships or by purchasing their services.

    The second route is more functional because fintechs can perform in areas where they have a competitive advantage and banks can focus on their areas of their expertise. While customers benefit from curated products and services at competitive prices, the regulator also takes comfort from the fact that the traditional players are well regulated.

    “Perhaps the sweet spot lies in fintechs acting as both competitors as well as collaborators. The existence of competition is necessary to create incentives for fintechs to invest in innovations as well as pushing traditional entities to stay on their toes. At the same time, collaboration is essential for innovations to be absorbed into the financial systems,” he said.

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  • Banks working on digitising locker agreements 

    Banks working on digitising locker agreements 

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    With the September 30 deadline of getting the signature of least 50 per cent of their locker holders on a revised agreement looming, banks are internally working on a process to get the agreements signed digitally.

    According to highly placed sources, individually banks may not have obtained signatures of even 30 per cent of existing locker holders for the revised locker agreements. Collectively for the banking system, the adoption of these new agreements for existing customers is estimated to be much less.

    New pacts

    To expedite the process, banks are exploring whether the new agreements could be signed digitally.

    Aadhaar-enabled signature verification, email confirmation and confirmation through SMS are some of the possibilities that banks are exploring.

    “We have communicated our plans to pursue the revised locker agreements through digital consent mode and the regulator is okay with this in priciple,” said a senior executive of a private bank.

    Banks are now working on the best possible modes of obtaining consent and signatures of locker customers digitally.

    “Back-end systems are being put in place to find out how best we can do this digitally.

    “In a week or two, forms or processes involved in obtaining the signatures digitally will be rolled out,” said a CEO of a public sector bank.

    A few weeks back, India’s largest bank, State Bank of India, said it is working on digitising the revised locker agreements.

    Private sector banks, especially those which have come up in the last 20 years, may find the process of digitising the signatures or finding an alternative to get the locker customers physically sign the revised agreement less cumbersome.

    Challenges

    While there is some redundancy with respect to residence and/or email addresses, the traceability of customers is still seen better because in most cases they would have an additional banking relationship apart from just the locker or the related fixed deposit.

    “The possibility of contacting and communicating with the customers is quite high,” said CEO of a private bank. The challenge is with public sector banks, where senior citizens would account for more than 50 per cent of operational lockers and they may not be traceable through a mobile number or email address.

    “Identification of customers get more challenging as we approach tier 3/4/5 cities,” said a banker aware of the matter.

    Pointers

    Digitally signing new locker agreements

    Banks exploring the possibility of obtaining consent and signature of locker customers for revised agreements

    Aadhaar-enabled signature verification, email confirmation and confirmation through SMS are some of possibilities currently explored

    New agreements will have to be in place by December 31, 2023.

    All existing customers should be notified by April 30, 2023

    By June 30 & September 30, 50 per cent and 75 per cent of existing customers should have signed the new agreement

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  • I-CRR effect: Banks, NBFCs rush to raise short-term funds

    I-CRR effect: Banks, NBFCs rush to raise short-term funds

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    MUMBAI – Liquidity tightening in the banking system following the introduction of the incremental CRR (I-CRR) has prompted banks and NBFCs to raise short-term funds from money markets to manage their immediate fund requirements.

    “In the backdrop of I-CRR and higher credit growth, banks will need to essentially raise funds via certificates of deposit (CDs) and bulk deposits. CD rates have gone up by about 10-15 bps in the last fortnight. Banks will be paying much more than CD rates for high value bulk deposits,” said V Lakshmanan, Head of Treasury, Federal Bank.

    Most major banks such as Punjab National Bank, Canara Bank, HDFC Bank, Bank of Baroda and Indian Bank have issued CDs in the last 10 days, with 3-month CD rates at 7.00-7.20 per cent levels. Rates on three-month CPs have been in the range of 7.20-7.40 per cent.

    I-CRR impact

    “Rates have increased because of I-CRR. Many issuers were waiting on the sidelines to raise funds after the policy. So even though ICRR got introduced, they had to come to the market and issue their papers,” said CA Ashish Jalan, Vice- President – Arete Securities.

    While earlier the expectation was that I-CRR will definitely be rolled back around September 8, a section of the market now believes that “it might get extended for a week or so” resulting in higher rates. This has prompted issuers to raise funds at the current levels, market participants said.

    In addition to the announcement of the I-CRR on August 10, liquidity in the banking system has also tightened due to GST payments and sustained robustness in credit demand. Banking system liquidity fell into a deficit of ₹23,111 crore on Tuesday, per RBI data.

    Banks prefer to offer higher interest on short-term (3-6 months) liabilities such as CDs as mobilising high-cost retail deposits could entail offering higher interest rates for a longer period. Similarly, NBFCs too have been looking to raise more short-term commercial papers (CPs) to avoid raising long-term funds at higher rates.

    Call money rate up

    “The call money rate has also risen above the repo in the last few trading sessions. Liquidity is drying up, but it is a temporary effect. Fresh borrowing for the short-term has resulted in CP rates going up and we expect them to remain elevated in the most liquid and AAA segments,” said Nagesh Singh Chauhan, Head- Debt Capital Markets, Tipsons.

    Market participants expect rates to start stabilising from the first week of September as government spending kicks in. However, advance tax payments from the middle of the month could cause renewed tightness, leading to the expectation that rates will remain elevated for the next 1-1.5 months.

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  • RBI withdraws need for sponsor for IDF-NBFCs

    RBI withdraws need for sponsor for IDF-NBFCs

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    The Reserve Bank of India (RBI) has withdrawn the requirement of a sponsor of IDF-NBFCs as a part of its revised regulatory framework issued on Friday.

    “An IDF-NBFC was required to be sponsored by a bank or an NBFC-Infrastructure Finance Company (NBFC-IFC). The requirement of a sponsor for an IDF-NBFC has now been withdrawn and shareholders of IDF-NBFCs shall be subjected to scrutiny as applicable to other NBFCs, including NBFC-IFCs,” the central bank said.

    Further, RBI has made optional the mandate to enter into a tripartite agreements for investments in the Public Private Partnership (PPP) infrastructure projects having a project authority.

    The guidelines have been revised in consultation with the government to enable IDF-NBFCs to play a greater role in the financing of the infrastructure sector, and to harmonise regulations governing financing of infrastructure sector by the NBFCs, RBI said.

    Capital and fund raising

    IDF-NBFCs will be required to have net-owned funds of at least ₹300 crore and capital-to-risk weighted assets ratio (CRAR) of 15 per cent with minimum tier-1 capital of 10 per cent.

    They will be allowed to raise funds through rupee or dollar-denominated bonds with at least a five-year maturity, and also through shorter tenor bonds and commercial papers up to 10 per cent of their total outstanding borrowings.

    “IDF-NBFCs can also raise funds through loan route under external commercial borrowings (ECBs). However, such borrowings shall be subject to minimum tenor of five years and the ECB loans should not be sourced from foreign branches of Indian banks,” it said.

    Single borrower exposure limits for IDF-NBFCs have been set at 30 per cent of tier-1 capital whereas for single group or borrower party the cap has been set at 50 per cent.

    Sponsoring IDF-MFs

    NBFCs have also been made eligible to sponsor IDF-MFs with prior approval of RBI, subject to it fulfilling capital requirement for IDF-NBFCs, having a net NPA ratio of less then 3 per cent and being profitable for the last three years.

    In addition to a company based IDF being set up as an IDF-NBFC which is regulated by RBI, Infrastructure Development Funds (IDFs) can also be et up as a trust and registered as IDF-Mutual Fund (IDF-MF) which is regulated by SEBI.

    IDF-NBFCs are non-deposit taking NBFCs which refinance post commencement operations date (COD) infrastructure projects that have completed at least one year of commercial operations, and toll operate transfer (TOT) projects as the direct lender.

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  • Issuers seek relaxation on certain product categories for card network portability

    Issuers seek relaxation on certain product categories for card network portability

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    Card issuers have approached the RBI seeking relaxation for certain products from the revised guidelines on card network portability, due to the high costs involved.

    Card issuers, majority of which are banks, have sought that the central bank impose the mandate for network portability for each product category or segment but not each product, given the higher cost and operational burden involved and the impact on existing card partnerships.

    “Issuers are saying just leave network options at the core product level that is, credit, debit, and prepaid. There are diversified cards within core products like co-brands, premium cards, etc. Management of sub-products will definitely become a challenge because each bank has hundreds of sub-products based on the customer segment,” said Mohit Bedi, Co-founder and Chief Business Officer, Kiwi- India’s First Credit Card on UPI Platform.

    Network portability

    The revised draft framework on network portability mandates issuers to offer every card on at least two networks and not to enter into bilateral arrangements with card networks, effective October 2023. Five networks currently operate in India, namely Visa, Mastercard, NPCI-backed RuPay, American Express and Diner’s Club.

    “The differentiating factors for networks are pricing, extent of their acceptability and the rewards that they offer. Fundamentally if another network is better across any of these, people should have the choice to opt for it but today that option does not exist,” said Abhishek Kothari, CEO, Pepper Money India.

    As such, most issuers have also been offering cards across more than one network after the data localisation framework asked some networks to temporarily pause new sourcing. Subsequently, YES Bank, which was entirely dependent on Mastercard, was forced to tie-up with other networks.

    Exemptions sought

    Exemptions have been sought in certain cases where service providers have exclusive tie-ups with networks such as Visa with the JetMiles programme or Amazon, or RuPay network for FASTag.

    For example, the ICICI-Amazon credit card is issued on the Visa network because Visa worldwide categorises e-commerce platform Amazon as a separate Merchant Category Code (MCC), thus levying a lower interchange of about 1.65 per cent compared with other merchant categories.

    “It becomes tricky in some situations, for example, Diners Club, which works exclusively with HDFC Bank. The Diner’s card is not available with other banks because Diner’s Club has much better product features as a network too. Similarly, NCMC (National Common Mobility Cards) are on Rupay only, it’s a prepaid card. How will that work? So, it becomes a new challenge for other sub-product categories as well,” Bedi said.

    There is also the issue of proprietary cards such as American Express, which is both an issuer and a network and its ability to then issue cards on other networks.

    Issuers then prefer a certain network because their cost expense is lower, industry players said, adding that even on an overall basis, while the interchange on Visa and Mastercard is almost four times that on RuPay, the global networks reimburse issuers for marketing costs which is a big line of fee income for banks. However, RuPay offers the additional benefit of linking credit cards to UPI.

    “In India, where cards are expected to grow significantly, this will ensure fair competition for networks to exist. Amidst this, RuPay being a new network should likely benefit as there are legacy contractual arrangements in place,” Kothari said, adding that while for card issuers this could translate to onboarding new network partners and higher operational costs, it would also mean more features and offers for consumers.

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  • Pilot project for public tech platform for frictionless credit to start from Aug 17: RBI 

    Pilot project for public tech platform for frictionless credit to start from Aug 17: RBI 

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    The Reserve Bank of India on Monday said the pilot project for public tech platform for frictionless credit will commence on August 17.

    During the pilot, the platform, which is being developed by Reserve Bank Innovation Hub (a wholly-owned subsidiary of RBI), will focus on products such as kisan credit card loans up to ₹1.6 lakh per borrower, dairy loans, MSME loans (without collateral), personal loans and home loans through participating banks, per a central bank statement.

    Enabling linkage with services

    The platform will enable linkage with services such as Aadhaar e-KYC, land records from onboarded State governments (Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh, and Maharashtra), satellite data, PAN validation, transliteration, Aadhaar e-signing, account aggregation by Account Aggregators (AAs), milk pouring data from select dairy co-operatives, and house/property search data.

    Based on the learnings, the scope and coverage would be expanded to include more products, information providers and lenders during the pilot.

    “The platform would enable delivery of frictionless credit by facilitating seamless flow of required digital information to lenders.

    “The end-to-end digital platform will have an open architecture, open application programming interfaces (APIs) and standards, to which all financial sector players can connect seamlessly in a ‘plug and play’ model,” RBI said.

    The platform is intended to be rolled out as a pilot project in a calibrated fashion, both in terms of access to information providers and use cases.

    The central bank said the platform will bring about efficiency in the lending process in terms of reduction of costs, quicker disbursement and scalability.

    The central bank said with rapid progress in digitalisation, India has embraced the concept of digital public infrastructure which encourages banks, NBFCs, fintech companies and start-ups to create and provide innovative solutions in payments, credit, and other financial activities.

    Credit appraisal

    For digital credit delivery, the data required for credit appraisal are available with different entities such as Central and State governments, account aggregators, banks, credit information companies and digital identity authorities.

    However, they are in separate systems, creating hindrance in frictionless and timely delivery of rule-based lending.

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  • Stablecoins pose existential threat to policy sovereignty, CBDC preferable: RBI

    Stablecoins pose existential threat to policy sovereignty, CBDC preferable: RBI

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    While stablecoins linked to underlying currencies are more feasible than private assets and offer an alternative to CBDC (central bank digital currency), they are only beneficial to certain economies to which they are linked, according to RBI Deputy Governor T Rabi Sankar.

    Stablecoins provide an international benefit, especially to linked economies such as US and Europe but are not necessarily good for countries like India owing to the transfer of seigniorage to private issuers to the extent that it replaces the use of the rupee in the economy.

    Also read: CBDC: A calibrated approach needed

    “That is one aspect we have to take into account. What happens to India’s capital regulations or monetary policy. If large stablecoins are linked to some other currency, there is a risk of dollarisation,” Sankar said at an event organised by IBA.

    “We have to be very careful about allowing these sorts of instruments. Stablecoins can provide some of this but they are only useful to a few countries that are linked. From the past experience in other countries, it is an existential threat to policy sovereignty,” he said.

    A stable solution then is for every country to have its own CBDC and for countries to then create a mechanism where the CBDCs can interface and transact with each other, he said, adding that while CBDC is being used a policy instrument in several jurisdictions, the RBI has no plan to do so.

    Cross-border transactions

    On the use cases of CBDC, Sankar said the same is required for global transactions if nothing else, adding that cross-border transactions are the biggest emerging use case at the moment.

    “The current global payment system… the corresponding banking arrangement that exists has features that add inefficiencies,” he said.

    This is because there are only a few entities that all transactions are routed through, which translates to higher costs for even small value cross-border remittances, and thus the system needs to be diversified.

    “As per World Bank estimates, a cross-border small value transaction, remittance transaction is at 6 per cent. That’s extremely high.”

    Urging banks to relook their remittance structure, Sankar said that given the technology and innovation available today, banks can no longer justify the high foreign exchange margins and remittance charges.

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  • The ongoing ‘retail-shift’ by banks may not be structural: RBI Bulletin

    The ongoing ‘retail-shift’ by banks may not be structural: RBI Bulletin

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    Based on the estimated retail bank credit cycle, the ongoing ‘retail-shift’ may not be permanent, but rather cyclical in nature and the credit growth may not continue to be high, according to an article in RBI’s latest monthly bulletin.

    The Scheduled Commercial Banks’ (SCBs) expectations of retail credit demand moderated and loan terms and conditions expected to be tightened in Q3 (October-December):2024, RBI officials Sujeesh Kumar and Manjusha Senapati said in the article “Retail Credit Trends – A Snapshot”.

    Retail bank credit has emerged as a major contributor to the overall bank credit growth, especially after the onset of the Covid pandemic.

    The retail credit outstanding at the end of March 2023 was ₹40.85 lakh crore, more than double of that in March 2018.

    The share of retail loans by SCBs in aggregate credit had increased from 24.8 per cent in March 2018 to 30.7 per cent in March 2022 and further to 32.1 per cent in March 2023 – the highest among the sectors.

    Analysis

    Empirical analysis using quarterly data for the period Q1:2008 to Q3:2022 suggests that the retail credit segment and its major constituents (housing and vehicle) are sensitive to interest rates as well as the asset quality of the banks’ loan portfolio, the officials said.

    Housing loans are more sensitive to both interest rates and asset quality than vehicle loans for the same period, they added.

    “So far, the relatively better asset quality in the sector may have fueled retail credit growth. Given the global headwinds and increasing uncertainties about monetary policy actions across geographies, it is necessary to assess trends in retail credit at a granular level on a continuous basis to evaluate the impact of financial sector developments on the overall economy,” Kumar and Senapati said.

    The officials observed that the rise of retail loans did not occur in the post-Covid period suddenly.

    They underscored that the share of industries was substituted by the retail segment during the last decade itself. Gradually, a ‘retail-shift’ was observed in terms of credit growth dynamics.

    Bank-wise, there was reduced dispersion of retail credit growth in the post-Covid period, which implies that the credit growth was robust across the banks

    • Also Read: Banks end FY23 with a robust 15.4 pc credit growth

    “The higher credit growth in the segment might be result of ‘herding behaviour’ displayed by banks in diverting loans from industry to retail segment…The better asset quality in the retail segment also appears to be contributing to banks’ increased focus on retail credit.

    “However, this is not a risk-free segment and not a panacea for asset quality concerns in non-retail loans…,” the authors said.

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  • Incremental Credit-Deposit ratio of Scheduled Banks’ declined in the financial year so far

    Incremental Credit-Deposit ratio of Scheduled Banks’ declined in the financial year so far

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    The incremental credit-deposit (C-D) ratio of scheduled banks’ declined in the financial year so far, as incremental deposit accumulation has been almost two times the credit disbursement.

    The incremental C-D ratio since March-end till June 2, 2023, declined to 50.24 per cent against 95.17 per cent in the year-ago period (March-end to June 3, 2022).

    The C-D ratio conveys how much of each rupee of deposit is going towards credit markets. A higher growth in this ratio suggests credit growth is rising quickly, which could lead to excessive risks and leveraging on the borrower’s side.

    “In the case of banks, it could imply that there will be a rise in non-performing assets when the economic cycle reverses. This ratio serves as a useful measure to understand the systemic risks in the economy,” according to the RBI.

    Deposit accumulation

    Deposit accumulation of scheduled banks at ₹6,65,238 crore in the financial year so far was almost 2.5 times the year ago period’s accumulation (of ₹2,63,819 crore)

    The robust deposit accumulation comes against the backdrop of higher interest rates being offered by banks on term (time) deposits and ₹2,000 bank notes being returned to banks by the public as RBI is withdrawing them from circulation in view of these notes not being commonly used for transactions and in pursuance of its “Clean Note Policy.”

    Credit disbursement

    Credit disbursement by scheduled banks at ₹3,34,272 crore in the financial year so far was about 1.33 times the year-ago period’s disbursement (of ₹2,51,099 crore).

    Banks seem to be witnessing relatively healthy credit growth in sectors such as services, personal loans, agriculture and allied activities, and large industry, going by the RBI’s sectoral deployment of bank credit data for April 2023.

    In a recent NABARD Research and Policy paper, Dennis Rajakumar, Director, EPW Research Foundation, said: “The credit (lending) to deposit ratio reveals the role of banks in ‘promoting productive sectors and contributing to economic growth’ (RBI, Report on Trends and Progress of Banking in India 2003-04: 63), and so a higher CD ratio implies greater credit orientation of banks.

    “The CD ratio informs the extent of banks credit in relation to deposits. The CD ratio could vary depending upon monetary policies. If the CD ratio remains unchanged, it means the credit expansion has kept pace with deposit mobilisation.”

    CARE Ratings, in a note, observed that credit demand was lower at the beginning of the fiscal year, hence pressure on deposit rates has eased. The rise in rates seems to have been arrested for now, at the end of May.

    “The trajectory of rates on the deposit side will be shaped by the pace of credit offtake; hence, we would need to observe the rate movement over the coming months to conclude if the rates have peaked or if further increases will continue,” per the note.

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  • Reliance on third-party technology providers requires robust risk management practices by banks: RBI DG Jain

    Reliance on third-party technology providers requires robust risk management practices by banks: RBI DG Jain

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    Banks must carefully manage the adoption of new technologies and ensure adequate controls and safeguards to address potential vulnerabilities, according to Reserve Bank of India Deputy Governor MK Jain.

    Additionally, the reliance on third-party technology providers requires robust due diligence and risk management practices to mitigate the risks associated with outsourcing.

    “Banking is undergoing a significant technology revolution, driven by the emergence of fintech companies. This is pushing traditional banks to embrace digital transformation and become agile and innovative.

    “While technology brings numerous benefits, such as increased efficiency and improved customer experiences, it also presents varied risks,” Jain said at the 25th SEACEN-FSI Conference of the Directors of Supervision of Asia Pacific Economies in Mumbai. 

    Data privacy

    The Deputy Governor observed that closely linked to technology is the issue of data.

    “The banking industry, by the nature of its business, possesses a wealth of data that can be leveraged for various purposes. This data covers customer information, financial transactions, credit histories, and more.

    Also read: Underserved, marginalised populations more vulnerable to cyber risks: RBI Deputy Governor

    “While there are significant opportunities to derive value from this data, it is crucial to acknowledge and address the inherent risks associated with its handling, including those relating to data breaches and privacy concerns,” Jain said.

    The Deputy Governor emphasised that supervisors need to examine IT issues holistically.

    Future proofing

    “It is crucial to determine whether banks have the capacity to develop robust IT systems that align with their business strategies. Future-proofing banks’ IT infrastructure becomes imperative, necessitating strategic investments in both capital and operational expenditure.

    “As virtual work environments and cyber risks become more prevalent, effective IT governance takes on heightened sign,” he said.

    He underscored that data analytics empowers supervisors with the ability to extract valuable insights from vast amounts of data.

    This enables them to make data-driven decisions, identify risks, and take timely actions to safeguard financial stability.

    “By leveraging the power of data analytics, banking supervisors can considerably strengthen their supervisory frameworks,” Jain said.

    The Deputy Governor said as banks adopt new technologies, it is essential for supervisors to be equipped with the necessary knowledge, skills, and resources to effectively supervise and regulate these advancements.

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  • Yield curve inversion persists in corporate bond market

    Yield curve inversion persists in corporate bond market

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    iThe inversion in the yield curve in the corporate bond market seems to be getting entrenched due to issuers’ preference for raising resources via 3-5 year bonds and investors’ yen for high-yielding long-term bonds with maturity of 10 years and above.

    The corporate bond market has been moving in tandem with the Government Securities (G-Sec) market, with a yield curve inversion emerging over the last couple of months. This is mostly due to a supply-demand mismatch.

    Normally, longer-duration interest rates are higher than short-duration ones. So, the yield curve normally slopes upward as duration increases. If short-duration interest rates are higher than longer-duration rates, a yield curve inversion happens.

    “Most of the corporate bond supply has been in the 3-5 year bucket. Bond supply in the 10-year bucket is scarce. Insurance companies and provident funds always want to buy bonds with maturities of 10 years and above. So, this has resulted in an inversion in the corporate bond yield curve, in line with G-Secs and State Development Loans,” said Aditya Gore, Head: International coverage and research, Fixed Income, Nuvama Wealth Management.

    He observed that a couple of weeks ago, a leading non-banking finance company issued five-year bonds at 7.73 per cent and 10-year bonds at 7.68 per cent. So the yield curve is already inverted.

    Today, a leading standalone housing finance company issued 10-year bonds at 7.75 per cent. But its 2026 bonds are trading at around 7.85 per cent, Gore said.  

    Normalisation soon

    “Once the RBI hints about rate cuts, the inversion in the yield curve should start getting corrected. In another couple of quarters, the normalisation of the curve should happen. Till then, the yield curve will be flat to inverted,” he added.

    In developed markets, an inversion in the yield curve implies an oncoming recession. In India, supply-demand dynamics generally determine the trajectory of the yield curve. So, the inversion in the yield curve is not a leading economic indicator.

    Pankaj Pathak, Fund Manager, Fixed Income, Quantum Mutual Fund, observed that declining inflation, peaked policy rates, and a comfortable external position are all strong backdrops supporting the bond market over the medium term.

    However, the near-term outlook is clouded by uncertainty over the timing, quantity, and distribution of rainfall amid forecasts of El Nino conditions.

    “Given that bond yields have come down significantly over the last three months, there is a high possibility of yields moving higher from current levels in the near term.

    “However, the upside on yields should be limited to 10–20 basis points given the overall macro backdrop being favorable,” he said.

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  • Liquidity conditions may remain easy for about 4 months

    Liquidity conditions may remain easy for about 4 months

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    Overall liquidity conditions will remain easy, with bank deposits likely to increase by ₹2 lakh crore due to return of ₹2,000 bank notes, until cash demand goes up during the festive season starting in October, according to experts.

    VRRR auctions likely

    So, there could be further decline in short-term money market rates, opined Pankaj Pathak, Fund Manager-Fixed Income, Quantum Mutual Fund. “There was an expectation that the RBI might announce measures to suck out excess liquidity. The RBI did acknowledge that the deposit of ₹2,000 denomination currency notes will add to the already high liquidity surplus in the banking system. “However, they chose not to deploy any durable liquidity absorption tool to reduce the excess liquidity. Instead, they will likely conduct variable rate reverse repo (VRRR) auctions of various tenors to absorb the excess liquidity temporarily,” Pathak said.

    Referring to the banking system witnessing an influx of liquidity during the last month, he said, “The main contributors to this increase in liquidity surplus were government bond maturities to the tune of ₹1 lakh crore, RBI’s buying of foreign exchange and deposits of ₹2,000 notes.”

    SBI’s economic research department, in a report, noted that liquidity surplus in the system has again increased with the net liquidity adjustment facility absorption at ₹2.2 lakh crore as on June 7 from an average of ₹1 lakh crore in April-May 2023. “The government surplus cash balances has also started declining from the third week of May. Even the deposit of ₹2,000 notes in banks has added to the liquidity…About 85 per cent of the ₹2,000 notes are deposited in the bank accounts and not exchanged for smaller denominations.

    “Thus, bank deposits are likely to increase by at least ₹2 lakh crore assuming some of the notes would already be with banks in currency chests. Overall deposit growth in FY24 should grow over 11 per cent y-o-y. This will effectively imply that spate of deposit rate hikes could be a thing of the past,” SBI economists said.

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  • RBI allows all factors to participate as financiers on TReDS platforms

    RBI allows all factors to participate as financiers on TReDS platforms

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    To augment the availability of financiers on TReDS (Trade Receivables Discounting System), the Reserve Bank of India (RBI) on Wednesday, allowed all entities that can undertake factoring business, to participate as financiers on such platforms.

    “The Factoring Regulation Act, 2011 (FRA) allows certain other entities / institutions to undertake factoring transactions. Accordingly, all entities / institutions allowed to undertake factoring business under FRA and the rules / regulations made thereunder, are now permitted to participate as financiers in TReDS,” the central bank notified.

    TReDS transactions fall under the ambit of ‘factoring business’ and currently only banks, NBFC-Factors and other financial institutions can be financiers.

    The RBI also permitted insurance facility for TReDS transactions to aid financiers to hedge default risk. This is because financiers usually place their bids keeping in view the credit rating of buyers, and are not inclined to bid for payables of low rated buyers.

    Insurers on TReDS

    As a result, insurance players will be now become the fourth participant on TReDS platforms, in addition to MSME sellers, buyers and financiers.

    TReDS platform operators will need to specify the stage at which insurance facility can be availed. Further, no insurance premium can be levied on MSME sellers, and collection of premium and related activities will be enabled through National Automated Clearing House (NACH) system.

    “Based on consent received from financiers and insurance companies, TReDS platforms could facilitate automated processing of insurance claims and specify timelines for their settlement through the NACH system. As of now, the credit insurance shall not be treated as a Credit Risk Mitigant (CRM) to avail any prudential benefits,” RBI said.

    Factoring units

    While TReDS guidelines provide for discounted or financed factoring units to have a secondary market, it has still not been introduced. Given the experience gained so far, TReDS platform operators may, at their discretion, enable a secondary market for transfer of FUs within the same TReDS platform, the central bank said.

    TReDS platform operators have also been permitted to settle all factoring units—financed, discounted or otherwise —using the NACH mechanism, with specified timelines for funds settlement. This is to overcome the inconvenience caused to MSMEs and for better reconciliation, as around 17 per cent of factoring units uploaded are not discounted or financed and buyers need to pay MSME sellers outside the system.

    To ensure transparent and competitive bidding by financiers, TReDS platforms will be required to display details of bids placed for a factoring unit to other bidders; without revealing the name of the bidder.

    Three entities — A.TREDS (Invoicemart), Receivables Exchange of India (RXIL) and Mynd Solutions (M1 exchange) operate the three TReDS platforms in the country; whereas C2FO Factoring Solutions has been given in-principle authorisation.

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  • Banks’ boards should ensure that managements are held accountable for their actions: RBI Deputy Governor

    Banks’ boards should ensure that managements are held accountable for their actions: RBI Deputy Governor

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    Banks’ Boards should appraise the performance of management objectively and ensure that they are held accountable for their actions, according to M Rajeshwar Rao, RBI Deputy Governor.

    “If management is not meeting expectations, Boards should take suitable action, including replacing the management, to improve the bank’s governance and risk management,” he said at a recent Conference of Directors of Banks.

    Rao observed that RBI looking at the “twin peaks” model for regulations — prudential regulation and conduct regulation — through the prism of governance with equal emphasis on the conduct of business through prudence.

    “It’s no doubt essential for the management to deliver good performance, but more importantly, this should be achieved by adhering to acceptable customer and market conduct and best corporate governance practices,” he said.

    He noted that RBI often comes across matters of conduct not getting the priority or attention of the Board which they should be getting. 

    “Customer service, customer conduct, ethical employee behaviour, data privacy, and cyber security are critical and important issues which assume even greater relevance in times of innovation, change, and business disruptions.

    “Good or rather best practices in these areas are the key soft pillars which build the edifice of a successful financial institution, more so in these challenging times,” Rao said.

    Therefore, there is a need to reflect on the role and expectations from the governance architecture — the Board and its Committees, the Independent Directors and the assurance functions in banks and other financial institutions on these issues.

    “In fact, the Board should drive a culture where the expectation would be to go beyond baseline compliance to regulatory and legal requirements and aim for higher, best-in-industry standards,” the Deputy Governor said.

    To this end, the Board must ensure a suitable policy framework for its own assessment regarding effectiveness and composition, in accordance with their strategies and risk profiles, both at the aggregated and dis-aggregated levels.

    Rao emphasised that the classic three lines of defence are clearly under the remit of the Board with the audit being an independent check and supervision being the final line of defence/ oversight.

    “Here the governance framework set out by the Board should ensure that the three lines of defence do the job as expected – much like in the game of football, where the forwards, the midfielder and the defenders should collectively keep the ball in play and ensure that the supervisor as a goalkeeper is not engaged,” he said.

    Coming to the link between regulation and governance, Rao observed that the regulators usually decide the regulatory perimeter and guide the regulated entities so that there are no accidents and surprises.

    “While it is for the regulators to issue instructions that enjoin upon banks to adopt the best practices insofar as governance is concerned, it is for the Board to set the strategic direction, engage with management, and conduct review of key policies and frameworks.

    “The Boards should manage alignment of performance with pay as well as enforce accountability to ensure adherence to the best practices while achieving the objectives set for the bank by the Board,” he said.

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  • RBI’s MPC will continue to be in pause mode in June meeting: SBI report

    RBI’s MPC will continue to be in pause mode in June meeting: SBI report

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    State Bank of India’s economic research department (ERD) expects one more pause by the Reserve Bank of India’s Monetary Policy Committee (MPC) in view of the recent Consumer Price Index (CPI) and Core CPI numbers. The MPC will hold its bi-monthly deliberations on June 6-8, 2023.

    “With CPI declining at 4.7 per cent in April, the question is whether 6.5 per cent is the terminal rate…Given that the current rate of 6.5 per cent is already higher than the required rate of 6.22 per cent, we expect one more pause by RBI MPC meeting in June 23, while carefully watching the CPI and Core CPI number in ongoing months,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

    The ERD’s machine learning-based analysis is indicating that this terminal rate could decline to 6 per cent in the next quarter, possibly opening up opportunities for MPC to look at the data trends more carefully for a rate action towards the end of the year.

    Ghosh noted that the US Fed has likely reached its terminal rate, soothing frayed nerves of markets going ahead.

    After hiking the policy repo rate cumulatively by 250 basis points from 4 per cent to 6.50 per cent since May 2022, the MPC hit the pause button at its last meeting in April.

    Governor Shaktikanta Das then said, “Let me emphasise that the decision to pause on the repo rate is for this meeting only…While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns.

    “Headline inflation is moderating but remains well above the targets of central banks…Looking ahead, headline inflation is projected to moderate in 2023-24. The monetary policy actions taken since May 2022 are still working through the system.”

    Das emphasised that the MPC will not hesitate to take further action as may be required in its future meetings.

    SBI’s ERD said the CPI reading for April 2023 at 4.7 per cent substantiates MPC’s decision to take a pause last month.

    Impact of climate change on growth

    The ERD said concerns remain on the growth front as India remains at the forefront of the most vulnerable countries to the likely adverse impacts of climate change.

    Ecowrap noted that India is at the 7th position out of 181 countries in the Global Climate Risk Index 2021, despite slew of controlling measures initiated to control green house gas emissions and promote renewable energy.

    “More than 3/4th of Indian districts are considered hotspots for extreme climate events which have a direct bearing on price prints volatility (mostly supply side).

    “It is evident that climate change poses a significant threat to India, impairing future growth materially if friction points remain significantly unchecked in time,” the report said.

    According to Ghosh, Credit, insurance and capital markets remain quite vulnerable to risks emanating from multiple drivers as the country braces for the return of El Nino this year.

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  • Don’t increase unsecured loans exposure: RBI to banks

    Don’t increase unsecured loans exposure: RBI to banks

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    As part of increasing caution amidst growing macro-economic uncertainties and bank collapses in the US and Europe, India’s central bank is asking banks back home to be watchful over their retail portfolios, particularly the unsecured loans. These include personal loans, credit cards, small business loans and micro finance loans.

    The overall share of unsecured loans as an average across private banks has increased by over 300 basis points since June 2020 and this hasn’t gone down well with the central bank.

    “As a measure of prudence, the RBI has asked banks to stay within the limits seen in FY23 with respect to unsecured loans,” said a CEO of a private bank.

    Credit deployment

    To be sure, as per the latest credit deployment data published by the RBI, unsecured loans lent between February 2022 to February 2023 stood at ₹2.2-lakh crore, higher than the deployment towards large corporates at ₹1.18-lakh crore.

    The size of the home loan market during this period was ₹2.49-lakh crore just marginally larger than the unsecured loans market. A report by CARE Ratings pegs the unsecured loans market at ₹13.2-lakh crore, almost equal to the total exposure of the banking sector towards NBFCs (at ₹13.1-lakh crore).

    In 2019, the risk weight on unsecured loans excluding credit cards was reduced from 125 per cent to 100 per cent to place them at par with other retail loans. It was also done to harmonise the risk weights to Basel-III requirements.

    “Despite repeated warning to banks, especially private banks, these loans growing faster than the secured retail loans. If the trend continues for longer, the regulator may once again increase the risk weights,” said a senior executive of a leading private bank.

    No proper checks

    With sachetisation of personal loans and 30-minutes sanctioning becoming a common practice among banks, the regulator is of the view that adequate credit checks may not be in place.

    “Right now with rapid growth in this space, at a micro level it is becoming difficult to assess the exact asset quality of these loans,” said a highly placed source. “The best way to avert a systemic risk is to reduce the pace of growth in the unsecured space,” said another top executive of a private bank.

    Apparently, even on the micro finance side banks have been sounded off informally not to overdo growth.

    “Even though demand for MFI loans and collection efficiencies have improved since mid-2022, it warrants for caution given the increasing from small finance banks and NBFCs,” said a person aware of the matter.

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