The Reserve Bank's (RBI) decision to reduce risk weightage on consumer loans which include personal loans is credit negative as it will encourage banks to increase their exposure to this loan segment at a time when credit risks are already increasing, said a report by Moody's Investors Service.

On September 12, the Reserve Bank of India reduced risk weightage on consumer loans such as personal loans to 100 per cent from 125 per cent.

"The reduction is credit negative as it will encourage banks to increase their exposure to this loan segment at a time when credit risks are already increasing from a slowing economy," it said.

"The reduction of risk weights is credit negative for banks because it will lower the capital requirements and thus the loss absorbing buffer on these loans. It will also encourage banks to further increase their exposure to this cyclical segment at a time when the macro-economy is slowing."

As per Moody's, the recent data has pointed to 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 per cent, within which private consumption grew only 3.1 per cent. This raises the risk that asset risk on unseasoned personal loans will rise as a result of potential deterioration in household financial conditions.

It said that personal loans have been reporting strong growth in India over the last few years. The segment's compounded annual growth rate (CAGR) of around 22 per cent over fiscal 2013-2019 far exceeded that of 11 per cent in overall banking system loans over this period. Personal loan growth has been particularly strong among large private sector banks, the report noted.

The strong growth of personal loans in recent years was supported by the yields offered by these unsecured loans which were amongst the highest within retail lending. A benign credit environment, characterised by relatively low credit costs across all key retail loan segments, was a key driver of this growth as it prompted banks to focus on personal loans for their higher yields.