The unconventional 35 basis-point rate cut isn’t the only thing the Reserve Bank of India is depending on to boost credit flow to the economy. RBI Governor Shaktikanta Das has also announced steps to incentivise banks to step up retail lending — a key factor that could push up consumption demand in the economy, which is facing a massive slowdown.
Between February and June, RBI announced three rate cuts amounting to 75 basis points, but banks reduced lending rates by less than 30 basis points, raising questions of monetary policy transmission.
At a press conference Wednesday, the RBI announced a relaxation in risk weights for all consumer loans, except for credit card receivables. A reduction in risk weights to 100 basis points from 125 basis points means the banks will have to set aside lesser funds to provide for these loans, thus ensuring better credit flow to these sectors at lower rates.
Governor Das said reduction in risk weights will help improve credit flow to these sectors. RBI Deputy Governor N.S. Vishwanathan pointed out that the risk weight for this segment was higher than what was mandated by Basel norms, and was actually brought in a few years ago when this segment saw excessive lending.
Besides credit to services, the personal loans segment is still one of the fastest-growing, despite a slowing growth since last year. Personal loans excluding credit card receivables grew at 16 per cent as of end-June this year, compared to around 17 per cent in the same period a year ago.