For some time now, the Reserve Bank of India (RBI) has expressed concern over the increase in unsecured consumer loans, including credit cards and personal loan norms. With its most recent circular, the RBI is putting on lenders to the explosive expansion of this market by requiring banks and non-banking financial companies (NBFCs) to increase the risk weight on these loans and reduce their exposure.
According to RBI data, personal loan growth was 23% and credit card outstanding growth was 30% compared to August 2022.
Due to the higher risk weighting, banks and NBFCs will need to set aside more capital for each of these loans. In short, it will guarantee that banks will not face problems if borrowers do not repay their loans. Lenders’ boards will also set restrictions on their exposure to certain consumer loan groups that they must adhere to. Also, right now, top-up loans secured by declining assets – like auto loans, for example – have to be handled as unsecured loans.
The key questions are: Will it now become more difficult for you to get a personal loan because of the RBI move? And how likely is it that banks will reduce credit card limits for their customers?
No direct impact on rates
Higher interest rates will not be implemented immediately. “Although the increase in risk weights is expected to impact the growth of these industries, most of the large banks and NBFCs are already well capitalized, with capital above the regulatory limits. Therefore, due to the increase in risk weights, banks may not currently be required to raise capital. Banks will therefore assess the impacts before determining whether any cost increases should be passed on to customers.
Although there would not be an immediate financial impact, banks may eventually need to increase their capital.
Moreover, NBFCs are expected to be more affected as their funding costs will increase. “NBFCs take loans from banks and give them to the end user.” Due to increase in risk weight their costs through borrowing from banks or issuing bonds etc. will increase. However, the ultimate impact will depend on the composition of resources and the proportion of unsecured consumer loans in the total portfolio of an NBFC.
Speaking about banks, while their unsecured loan portfolios have grown faster than overall credit growth, commercial banks’ exposure to this market is more hedged than that of NBFCs.
The risk weight on new and existing unsecured consumer loans, including personal loans, has been increased by RBI from 100% to 125% for both banks and NBFCs. The risk weight of credit card receivables of banks has increased from 125 per cent to 150 per cent, while the risk weight of NBFCs has increased from 100 per cent to 125 per cent.
Easy credit days yet to come?
What is more obvious to the average borrower is that the days of simple loans are over. The significant increase in unsecured loans has become a matter of concern for the RBI. “To mitigate any unexpected contingencies, the central bank is setting higher capital layouts for such exposures of banks and NBFCs,”.
Additionally, how increased capital requirements will gradually reduce the level of competition in the consumer lending market, where banks, NBFCs and fintechs—entities that collaborate with regulated entities—will compete for customers.
First noticeable impact would be banks issuing new unsecured consumer loans with additional due diligence. RBI is telling them, “Banks can conduct business normally, but they need to step up their due diligence.”
People with steady income flow and high credit scores can benefit from this. On the other hand, people with inconsistent income and bad credit may find it more difficult than before to obtain a loan.
How does it affect credit cards?
According to the experts we spoke to, credit cards won’t see any immediate changes, like lower credit card limits or increases in interest rates.
The major source of risk is credit card debt which is not paid even after the due date, hence it should be given priority.
However, going forward, banks and NBFCs may start focusing more on customers with higher credit profiles, which will slow the rapid expansion seen so far.