In a recent development, the Reserve Bank of India (RBI) has flagged the reliability of banks on retail loans over the slowing economic activity and negative consumer sentiment. RBI is contemplating to set up a granular lending strategy to offset the risk component in its annual publication on trend and progress of the banking sector in the country.
In a report, RBI stated that the lenders are focusing mostly on retail loans in comparison with large industrial loans as the probability of bad loans in the case of the former has been traditionally low. The regulator, RBI, claimed that the slowing credit growth had been a concern.
The report noted that the strategy might seem to be a useful risk mitigation tool; however, it comes with a few limitations. It results in the slowdown of consumption; the overall economic growth may affect the demand and quality of retail loans. It also claimed that the household leverage and indebtedness requires focus concerning the overall financial stability.
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Since corporate loans have been at multi-year lows, risk-averse lenders have been eagerly getting diverted towards retail loans. On the other hand, retail asset quality has been going through stress as individual borrowers are delaying payments lately. The delay in payments is especially witnessed with auto and two-wheeler loans, as well as loans are taken to purchase durable consumer products as per the data from the credit rating CRIF High Mark.
RBI expressed that the need of the hour is to resume the industrial credit lending to regenerate a virtuous cycle of investment, capex, and growth. It also mentioned that some sectors need policy attention to avoid stress. Straightening the risk pricing in lending is of utmost importance to keep the health of the banking sector on a check while adequate credit for productive sectors is ensured.
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