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Curbing exuberance
Context:
Reserve Bank of India had, in its financial stability report, pointed out that retail loans had grown at almost twice the pace of gross advances over the past two years.
Changing Loan Composition
- RBI Report Highlights Shift: RBI expressed concern over the changing composition of secured and unsecured loans in total advances during a specific period.
- Growing Share of Unsecured Loans: The report noted an increase in the share of unsecured loans, raising concerns about potential risks.
- Special Mention Accounts in Retail Segment: The proportion of special mention accounts in both secured and unsecured advances raised alarms in the retail segment.
RBI's Response and Advisory
- Governor's Advisory: RBI Governor Shaktikanta Das advised banks and NBFCs to strengthen internal surveillance mechanisms and address potential risks.
- Implementation of Measures: RBI raised risk weights for consumer loans, excluding certain categories, aiming to curb exuberance in unsecured lending.
- Focus on NBFC Exposure: Regulatory measures targeted specific segments, especially loans below Rs 50,000, where NBFCs have substantial exposure.
Potential Impacts and Need for Vigilance
- Cost of Capital Impact: Regulatory measures could impact the cost of capital for loans, influencing both the supply and demand sides.
- Concerns about Unsecured Loans: Growing concerns about the surge in unsecured loans reflect worries about borrowers' repayment capabilities and potential default risks.
- Ongoing Vigilance and Regulatory Interventions: Continuous monitoring and targeted regulatory interventions are crucial to mitigate risks and ensure financial system stability.
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