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Moody's: India's reduction of risk weights on consumer loans is credit negative

The Reserve Bank of India's decision to cut risk weights on consumer loans is credit negative because it will encourage banks to increase their exposure to the cyclical consumer lending segment amid rising risks from a slowing economy, Moody's said.

The central bank on Sept. 12 reduced risk weighting on consumer loans such as personal loans to 100% from 125%. The central bank's move came amid a slowing macro economy. Citing recent data, Moody's said there was a sharp deceleration in economic and consumption growth in the first quarter of fiscal 2020, when real GDP growth slipped to a multi-year low of 5%.

The rating agency said the move would also lower banks' capital requirements and, in turn, their loss-absorbing buffer on these loans. It added that personal loan growth has been particularly strong among large private sector banks. The sound growth was supported by the yields offered by these unsecured loans which were among the highest within retail lending.