Reserve Bank of India (RBI) deputy governor Swaminathan Janakiraman on Friday said the hike in risk weights on consumer lending is to end any sort of exuberance that may be exhibited by certain lenders.

"It is a pre-emptive measure to bring certain prudence and to bring an end to any sort of exuberance that may be exhibited by certain lenders. Efforts were made over the past three-four months by way of sensitising the players to put adequate internal control measures to ensure that the risk build-up is avoided," Swaminathan says in a press conference after the monetary policy meeting. "As the market was not responding enough to that, there was a necessity that we watch the data and based on that data, we have taken certain prudential measures that the regulated entities have to put in place," he says.

While it is too early to conclude, risk management practices are getting better, says the RBI deputy governor. "Any business model that is likely to throw up enhanced risk is curtailed. It is not to curtail growth. We have taken steps to exclude growth drivers like home loans, vehicle loans, etc," he says.

These measures were intended to address the inter-connectedness that was building up within the financial system, says Swaminathan. Unsecured lending was growing at about 24-25% year-on-year as compared to 12-14% growth in other lending.

"We have tried to calibrate bank lending to NBFCs through risk weights. And NBFCs growth in certain segments was an outlier, so we had to add risk weights," he says. "The measure is not to deny liquidity or ration lending. We would like lenders to put in adequate risk weights."

The banking regulator hiked the risk weights of consumer credit exposure of banks and NBFCs by 25 percentage points to 125%. Higher risk weight means that banks and NBFCs will need to set aside extra capital for personal loans.

"Risk weights were announced to moderate credit growth in certain sectors. The tap is open, only the pressure has been reduced a bit," says Rajeshwar Rao, deputy governor of RBI.

In a press conference after the monetary policy announcement on Friday, Das says these are precautionary measures that have been taken. "Our endeavour is always to act proactively before the bubble bursts or stress builds up. These are pre-emptive measures," he says.

The RBI governor says the primary target of monetary policy is price control and attaining 4% inflation target. "We still have a distance to cover to reach 4%. Monetary policy loosening is not on the table for now," says Das.

Last month, Das flagged the increasing interconnectedness between banks and non-banking financial companies (NBFCs), saying it merits close attention. NBFCs are large net borrowers of funds from the financial system, with their exposure from the banks being the highest. "Banks are also one of the key subscribers to the debentures and commercial papers issued by NBFCs. NBFCs also maintain borrowing relationships with multiple banks simultaneously," the RBI governor said, adding that such concentrated linkages may create a contagion risk.

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