Consider using debt-service and debt-to-income ratios to assess retail borrowers’ viability: RBI bulletin

Subject :Economy

Section: Monetary Policy

Context:

RBI’s latest monthly bulletin says that policymakers need to consider structural prudential tools such as debt-service ratio and debt-to-income ratio to assess viability of retail borrowers.

More on news:

There is a persistent credit growth in certain segments of retail credit.
Risk weights on certain segments of consumer credit were enhanced by 25 percentage points.
Between 2007 to 2023, the share of unsecured advances in retail credit increased from 25 to 35 per cent.
The share of major segments representing the secured credit remained stable.
The housing loans continue to be the single largest sub-segment which constitutes around 48 to 50 percent of retail credit.
The vehicle loans constituted the second largest segment accounting for about 10 to 12 percent share.

Surge in retail credit growth:

The Indian economy is witnessing a surge in retail credit growth.
Between 2015 to 2023, the personal loans or retail credit registered a compounded annual growth rate (CAGR) of 17 per cent in outstanding amounts and 15 percent in borrower accounts.
Non-food credit registered a CAGR of 10 percent in outstanding amounts and 12 per cent in borrower accounts.

Measures to be adopted

Debt service ratio:
- A country’s debt service ratio is the ratio of its debt service payments (principal + interest) to its export earnings.
- The debt service ratio is one way of calculating the ability to repay debt.
- A country’s international finances are healthier when this ratio is low.
- For most countries the ratio is between 0 and 20%.
- India’s external debt of $624.7 billion at March-end 2023 with a debt-service ratio of 5.3% is within the comfort zone

Debt-Service Coverage Ratio (DSCR)
- The debt-service coverage ratio (DSCR) measures a firm’s available cash flow to pay current debt obligations.
- The DSCR shows investors and lenders whether a company has enough income to pay its debts.
About Debt Income Ratio:
- The debt-to-income ratio (DTI) measures a borrower’s debt repayment capacity as per their gross monthly income.
- DTI is the gross of all monthly debt payments divided by the gross monthly income, calculated as a percentage.
- The debt-to-income (DTI) ratio measures the amount of income a person or organization generates in order to service a debt.
- A low DTI ratio indicates sufficient income relative to debt servicing, and it makes a borrower more attractive.
About Account Aggregator Network:
- An Account Aggregator (AA) is a type of RBI regulated entity (with an NBFC-AA license) that helps an individual securely and digitally access and share information from one financial institution they have an account with to any other regulated financial institution in the AA network.
- Data cannot be shared without the consent of the individual.
- Account Aggregator replaces the long terms and conditions form of ‘blank cheque’ acceptance with a granular, step by step permission and control for each use of your data.