Increasing interest rates indiscriminately affects all borrowers, but tightening prudential norms, particularly in high-risk sectors like unsecured lending for discretionary purchases, demonstrates a more strategic shift in RBI’s approach
The Reserve Bank of India (RBI) recently directed banks and non-banking financial companies (NBFCs) to increase the risk weights for consumer credit and bank credit by an extra 25 percentage points. This means that banks will need more capital, and as a result, the interest rates for loans to consumers might go up.
One of the members of the Monetary Policy Committee (MPC), Ashima Goyal, actually hinted at this in the October policy when she said that taking precautionary steps, like tweaking loan-to-value (LTV) ratios or adjusting risk weights, would be a smarter move than pushing policy rates higher.
“This also resonates with the monetary policy stance wherein incremental withdrawal of easy money availability is the bottom line, as it poses a risk of unnatural demand,” agrees Akhil Mittal, Senior Fund Manager, Tata Asset Management.
“Current growth in some segments of credit does poses a threat of speculative demand, and hence the RBI is actively working to contain that risk. Monetary policy alone cannot respond to all the developments that impact the economy, and hence, central banks do look at tools and potions outside monetary policy to ensure stability and meet objectives, ” adds Mittal of Tata Asset Management.
“Indeed, the RBI’s move reflects a strategic shift. While increasing policy rates indiscriminately affects all borrowers, the decision to tighten prudential norms, particularly in high-risk sectors like unsecured lending for discretionary purchases such as gadgets, demonstrates a more targeted approach,”says Jaya Vaidhyanathan, CEO, BCT Digital.
Rishabh Goel, co-founder and CEO, Credgenics says that the RBI’s actions suggest a departure from relying solely on traditional monetary policy tools, such as interest rate adjustments. Instead, the RBI is strategically exploring more regulatory avenues to address the potential risks associated with unsecured lending.
“This move reflects a nuanced approach to managing inflation and demand, highlighting the RBI’s commitment to employing a diversified set of tools to navigate the dynamic economic challenges proactively and effectively, says Goel.