Banks and non-bank lenders are reassessing their personal loan portfolios, leading to a potential decline in the proportion of personal loans within overall co-lending assets under management.
The Reserve Bank of India’s revision in risk weight on unsecured consumer credit, raised to 125% from the previous 100%, is prompting strategic recalibration among financial institutions.
Under co-lending arrangements, banks and NBFCs collaborate to provide loans to the priority sector, sharing the risk in an 80:20 ratio. This model enables mid-sized and smaller NBFCs to access bank funding and diversify their funding sources efficiently, while banks benefit from access to niche customer segments and geographies.
According to a report from CRISIL Ratings, NBFCs’ co-lending assets under management have surpassed Rs 1 trillion, with personal loans constituting a significant portion. However, with the increased risk weight, the growth pace of personal loans in co-lending arrangements is expected to slow down.
Volumes seen down
While secured loans are likely to dominate the co-lending business mix, there may be a decrease in the volume of business, with banks potentially reducing their exposure to certain products. This shift towards secured loans reflects a preference for lower-risk lending options, particularly in partnerships where there is limited familiarity between lenders.
With the RBI’s heightened scrutiny, lenders are expected to adopt a more selective approach to credit, favoring partnerships in business and secured loans over personal loans. The increase in risk weights on unsecured consumer credit serves as a mechanism to moderate the pace of loan growth and strengthen underwriting standards.
While secured loans offer lower delinquency rates compared to unsecured loans, scaling secured lending presents its own challenges, given the complexity of evaluating and managing collateral. Despite the hurdles, NBFCs are likely to prioritize increasing the share of secured loans within their overall assets under management, aligning with regulatory directives and risk mitigation strategies.
