RBI's now tackling systemic instability

Higher risk weights for bank lending to consumers addresses a systemic vulnerability that RBI has warned about, and now acted upon. Consumer credit has taken up some of the slack in industrial lending after banks were required to clean up their balance sheets. Shadow lending to infrastructure has also been subjected to greater scrutiny, causing NBFCs to redirect credit to consumers. Consumption remains the main driver of India’s growth, and it has been instrumental in the post-pandemic economic recovery. But the associated concentration of consumer credit in the banking system calls for macroprudential measures, which are now in place. The central bank’s proactivity is guided by the stress generated in the banking system due to an earlier concentration of industrial credit.

The timing of the RBI move also suggests it is now sanguine about consumption recovery and industrial credit revival. Its monetary tightening cycle has been particularly sensitive to sacrificing growth, and the squeeze on consumer credit is being applied when its impact is unlikely to be felt acutely. Banks are in good health and can absorb a deceleration in personal loans. The system-wide exposure to unsecured credit is within manageable limits. This may be the most opportune time to improve underwriting. RBI’s preventive action now is in stark contrast to the lending freeze it had to subject banks to as a cure for their bad loans a decade ago.

Credit is one of the props for consumption. And the others, such as price and income supports, remain in place. These are needed more to shore up consumption lower down the pyramid. Credit typically flows to the top-consuming segments, which makes for uneven, and slowing, growth. GoI is signalling its intent to prolong welfare commitments, and RBI has taken its cue to clamp down on systemic instability.