Central bank whack-a-mole with lenders

Hello, I'm Ira Dugal and I head financial news for Reuters in India. Join me each Tuesday as I lead you through the biggest stories out of India, and Asia.

The Indian central bank this week stopped four non-bank lenders from issuing fresh loans, the most recent in a series of similar regulatory steps over the past 12 months. What's driving these actions? That's our focus this week.

India and China have reached a border patrolling pact, potentially resolving a long-smouldering dispute that erupted again four years ago with the killing of at least 20 Indian soldiers and four Chinese troops in hand-to-hand combat. Read the latest on the agreement here.

In India's equity markets, foreign outflows have surged in October and are on track to reach a monthly record. Is it the "sell India, buy China" trade? Read on for more.

The Reserve Bank of India (RBI) over the past week barred four non-bank lenders from disbursing loans, citing regulatory violations that included unfair and usurious lending practices.

Since late last year, the central bank has been stepping up efforts to rein in unruly lenders, under RBI Governor Shaktikanta Das' drive to dampen "exuberance of all forms" in the financial sector and forestall potential threats to "sustainable" lending.

The central bank is keen to cool debt-driven consumption and to pre-empt a build-up of bad loans, with the latest bank earnings showing the beginnings of a rise in delinquencies.

Das repeated his warnings this month, aiming specifically at non-bank lenders and asking them to avoid a "growth-at-any-cost" approach to lending. "The consequent high cost and high indebtedness could pose financial stability risks," Das said.

Behind this concern is the changing behaviour of Indian households.

As incomes and aspirations rise in the world's third-largest economy, consumers are taking on debt not just to buy homes, but to pay for smart phones or holidays or other items once considered luxuries. This has pushed credit growth – especially for credit cards and other unsecured lending – beyond the central bank's comfort zone.

India's overall household savings fell to 18.4% of GDP in 2022-23, the RBI noted in its latest Financial Stability Report in June. That compares with an average of 20% throughout the previous decade.

The report raised the alarm over both shrinking savings and the rise in financial liabilities because of retail loans. "Household debt warrants close monitoring from a financial stability perspective," it said.

Accordingly, a number of central bank actions over the past year have targeted small consumption loans, as well as hyper-aggressive lenders and lending schemes that are jostling to profit from them.

After raising capital requirements late last year for banks to cover their personal and credit card loans, the central bank widened its scrutiny this year to include mortgage top-up loans, algorithm-based lending and peer-to-peer loans. It has also tightened scrutiny of fast-growing fintech firms.

These actions are starting to have some effect.

A September report from India's largest credit bureau, TransUnion CIBIL, showed that growth in personal loans was flat in the three months ended June 2024, compared with 18% growth in the same period last year. The share of loans to first-time borrowers fell as lenders turned cautious.

Growth in bank loans overall has also moderated, reflecting "the impact of tighter macroprudential policies and higher interest rates", Nomura said in a note last week.

This is helping to address another challenge flagged by the central bank: Deposit growth has been falling below credit growth, creating liquidity challenges for lenders.

And while non-bank lenders and fintech ventures may grumble about the RBI's intrusions, Deputy Governor J. Swaminathan last week argued the case for such "proactive oversight".

"[I]magine a person teetering on the edge of a cliff, seemingly about to fall, only to be pulled back just in time by a watchful observer," he said in a speech at a central banking conference.

"When central banks intervene in such a manner to prevent a potential crisis, those they protect may claim they didn't need saving at all. "

Is the central bank's pre-emptive action justified to prevent a build-up of risk in India's financial sector? Write to me at ira.dugal@thomsonreuters.com.

"We reached an agreement on patrolling and with that we have gone back to where the situation was in 2020 and we can say with that the disengagement process with China has been completed."

Indian Foreign Minister Subrahmanyam Jaishankar to NDTV, after the government announced a pact to resolve a four-year-old border conflict. Read about the history of the conflict and its impact on economic ties between the two nations.

Foreign outflows from the Indian stock market are on track to hit a record high in October in absolute terms. Foreigners' net sales had by mid-month already reached $8.4 billion, surpassing the previous monthly record set in March 2020, and rose further in the latest data on Friday to $9.9 billion.

A Bank of America survey earlier this week said global fund managers were paring their India allocations in favour of China, which has announced a series of steps to revive its sputtering economy.

Viktor Shvets, global strategist at Macquarie Capital, said this is a short-term call. "India versus China remains the single most important question facing EM (emerging market) investors, and it is becoming harder to make this choice," he wrote in a note last week.

Muslims in the Indian capital have been congregating in enclaves away from the nation's Hindu majority, seeking safety in numbers following a deadly 2020 riot and an increase in anti-Muslim hate speech, Reuters reported.

Segregation nationally has increased significantly in the past decade, said London School of Economics political anthropologist Raphael Susewind, who has overseen long-term field work on India's Muslim population.

This newsletter was edited by Edmund Klamann, Deputy Head, Asia Desk in Singapore.

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