The Reserve Bank of India (RBI) has taken a significant step to address concerns about the escalating trend of unsecured consumer loans, personal loans, and credit card debt.
In response to a surge in such loans, the RBI has increased the risk weight on these financial products for both banks and Non-Banking Financial Companies (NBFCs).
This move is expected to influence the lending landscape and reshape the dynamics of personal and consumer loans.
Key Changes and Limits:
RBI data reveals a substantial increase of 33 percent in personal loans and 30 percent in credit card outstanding in August 2023.
To mitigate the risks associated with these loans, the central bank has imposed higher risk weights. Additionally, limits for offering such loans have been established.
Banks and NBFCs are now required to allocate more capital for these loans, ensuring a safety net in case of non-repayment.
Impact on Personal Loans and Credit Cards:
Amidst these changes, questions arise about the accessibility of personal loans and potential reductions in credit card limits.
Concerns have surfaced among consumers following the RBI’s risk weight adjustment.
The immediate impact on loan interest rates, credit limits, and loan approval rates is a matter of speculation.
According to Shibani Kurian, Senior Executive Vice President at Kotak Mutual Fund, immediate interest rate hikes are unlikely, as major banks and NBFCs currently possess ample capital, surpassing regulatory requirements.
The move is expected to impact the growth of certain loan segments, prompting financial institutions to assess the potential effects before passing on any increased costs to customers.
Impact on NBFCs:
Corporate trainer Jaideep Sen suggests that while the immediate impact on bank costs may be minimal, caution in lending practices may increase.
Naresh Malhotra, former SBI executive and director of JCRC LLP, highlights that the impact on NBFCs could be more significant.
The increased cost of funds for NBFCs may impact their ability to offer loans, particularly unsecured consumer loans.
Precautions by Banks and NBFCs:
Ritesh Srivastava, CEO and Founder of FREED, notes that financial institutions are already exercising caution in loan approvals, with a notable decline in the approval rate.
This strategic move by the RBI aims to make loan disbursal more expensive for banks and NBFCs, thereby moderating the pace of loan growth.
Credit Card Customers Unaffected:
Experts suggest that credit card customers are unlikely to face an immediate impact.
Reductions in credit limits or higher interest rates on outstanding amounts are not expected in the short term.
Despite the higher risk associated with credit card outstanding, current circumstances indicate a stable scenario with no imminent adjustments to credit limits.