Consumers could face costlier personal loans as a result of RBI warnings

17 Nov 2023 , 01:59 AM

The Reserve Bank of India intervened on Wednesday to increase the cost of lending to the unsecured personal loan market by asking banks and non-banks to set aside additional capital, following weeks of warning lenders about the spike in these loans.

The risk weight on consumer credit was raised by the RBI from 100% to 125%, a quarter increase.

This implies that banks will now need to retain Rs 11.25 in capital instead of the previous requirement of Rs 9 for every Rs 100 they lent.

Additionally, the regulator increased the risk weight on bank loans to NBFCs (whose risk weight is less than 100%) and credit card receivables. Top-rated finance companies will pay more to borrow money from banks as a result of this policy, but NBFCs that lend to priority industries like housing and small and medium-sized businesses would not be affected. Loans for a house, a car, or schooling won’t be impacted.

Bankers claim that tighter lending standards could hurt NBFCs further.

Despite the RBI raising the risk weightage for unsecured personal loans, NBFCs do not envisage an overall increase in retail lending rates because the regulator has made a number of exceptions.

‘Consumer loans are covered by the rules. Excluded are gold, house loans, business loans to MSMEs, MFIs, and other loans. According to what we’ve read so far, loans to NBFCs and housing finance companies—which qualify to be classified as priority sectors—do not appear to be affected by the increase in risk weightage, according to IIFL Finance group CFO Kapish Jain, who talked to TOI. ‘We will have to wait and see what impact the circular will have on interest rates as we interpret the same’ he stated.

Bankers predicted that the impact on NBFCs would be greater. ‘Neither our bank nor the majority of other banks include consumer credit as a major component of their retail portfolios. Lenders allocate a large portion of their portfolio to consumer loans mostly within the NBFCs market, according to A S Rajeev, MD & CEO, Bank of Maharashtra, who talked to TOI.

‘Across different banks, bank lending to NBFCs ranges from 12% to 15% of their overall loans. But the majority of these loans are given to real estate finance firms. Thus, only about 25% of banks’ total NBFC portfolio will be impacted by the new regulations,’ he continued.

Since lending rates usually take into account the amount of capital that must be maintained as an input, larger capital needs may result in higher interest rates. Growth may be slowed down by higher loan rates, but lending rates are not solely determined by formulas; they are also affected by market demand and competitive dynamics.

The RBI made it apparent how unhappy it was with some of the loans being made available. Retail loans have climbed by 30% while bank credit growth has increased by about 20%. It is believed that credit card debt has increased by almost 30% over this time. Additionally, banks have been providing loans to non-bank financing firms that provide consumer, personal, and unsecured loans.

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