Unsecured loan growth to remain strong even with higher risk weights: Axis Capital

The growth in the unsecured loans segment will remain strong even if the Reserve Bank of India (RBI) increases the risk weights for such lending, according to a report by Axis Capital Research.

Risk Weights

The RBI has asked lenders to be more diligent about unsecured lending to ensure that no undue risk gets built up in the system because of high growth in unsecured assets such as personal loans and credit cards.

According to some reports, the regulator may increase the risk weights for such loans, which moderates a lender's ability to lend to such segments as the capital charge goes up.

Growth Can Remain Strong

However, the report by Axis Capital Research said that growth can remain strong even with higher risk weights.

The note said the RBI had reduced risk weights on unsecured personal loans to 100 per cent from 125 per cent in September 2019, while credit cards continue to carry 125 per cent risk weight.

If the RBI reverts the risk weight on personal loans back to 125 per cent, the core capital for banks will get hit under 0.40 per cent, the note said.

Asset Quality

If asset quality holds up and risk-adjusted returns are favourable, an increase in risk weights alone may not lead to any significant slowdown in the growth of unsecured personal loans, the note said.

It said the loan is being driven by both banks and non-banks and added that the NBFCs (non-banking finance companies) depend on fintechs for the lending growth. The fintechs hold nearly half of the market share by value, it said.

Delinquencies

The delinquencies on the product remain low, it said, adding that any rise in provisioning will be manageable for banks.

For banks, the combined share of unsecured retail loans which have not been paid for over 30 days has declined to 2.38 per cent in March from 4.2 per cent two years ago, the brokerage said.

Large Banks Are Better Placed

It said large banks, having strong customer ownership, growing digital capabilities like the use of AI/ML, digital scorecards, better insights into customer cashflows and self-funding via deposit balances, are better placed for the opportunity in unsecured lending.

The growth of unsecured loans in India is expected to remain strong even if the RBI increases the risk weights for such lending. This is because the demand for unsecured loans is being driven by both banks and non-banks, and the delinquencies on the product remain low. Large banks, with their strong customer ownership and growing digital capabilities, are better placed to tap the opportunity in unsecured lending.