As the Reserve Bank of India wants banks to go slow on unsecured lending, a major impact could be felt in securitisation of such loans. Further with the central bank governor highlighting the possible risks to the financial balance of the country because of increased dependency on technology, industry insiders fear that banks will go slower while dealing with tech enabled NBFCs.
In a note issued today, credit rating agency ICRA said that the sell down of consumer credit pools of non banking finance companies (NBFCs) is expected to slow down in the current year.
Sell down is the act through which the NBFCs that hold these unsecured assets on their books sell them to banks or securitise them in return for liquidity. This helps them liquidate their assets on time and free up cash for further lending.
In the same note, ICRA said that ‘sell down’ of loans by consumer lending NBFCs stood at Rs 1,150 crore in FY2023. In the first half of the current fiscal year, the amount had already crossed Rs 800 crore, ICRA said.
On November 16, the RBI increased the risk weightages of unsecured credit for NBFCs and banks to 125% from 100% previously. This created a massive flutter in the entire ecosystem, given consumer lending has shot up in recent times.
RBI data shows that in the last two years, credit card outstanding has shot up 64%, while personal loans and consumer durable loans went up 57%.
On November 22, the RBI Governor said that banks need to be careful about relying heavily on technology to underwrite customers, thereby instructing lenders to go slow on consumer credit disbursal.
“Banks and NBFCs need to be careful in relying solely on pre-set algorithms as assumptions based on which the models are operated,” said RBI Governor Shaktikanta Das at a conference organised by FICCI and the Indian Banks’ Association in Mumbai.
Das added that customer underwriting models need to be calibrated multiple times to ensure that they count in changing macroeconomic conditions.
“It is necessary to be watchful of any undue risk buildup in the system due to information gaps in these models,” he said.
Overall, Das spoke about the interconnectedness of the banking ecosystem. Lending fintechs, NBFCs and banks all operate as part of the same value chain, and any major risk buildup in one part can escalate across the chain quickly.
This is not the first time the governor has asked banks to exercise caution. Last month, Das had similarly asked financial services players to exercise caution while giving out unsecured consumer credit.
Industry insiders told ET that there is bound to be some slowdown in the market given that the cost of funds for NBFCs and fintech lenders will go up in the short term.
While there will be some impact in unsecured consumer lending books, the larger securitisation market should continue to grow as this asset class forms less than 3% of the overall space, ICRA said in the note issued today.
