RBI Tightens Norms to Address Rising Unsecured Credit: Impact on Personal Loans and Credit Cards!

Introduction

RBI Tightens Norms: In response to the surge in unsecured credit, particularly in personal loans and credit cards, Indian banks have caught the attention of the Reserve Bank of India (RBI). This heightened risk has prompted the RBI to take proactive measures to safeguard the banking system and mitigate potential stress. As of Thursday, the RBI has increased the risk weights on consumer credit, credit card receivables, and non-banking finance companies (NBFCs) by 25 percentage points, reaching up to 150 percent.

The Unsecured Credit Challenge

Over the past year, unsecured loans, primarily in the form of personal loans and credit cards, have witnessed a remarkable increase, outpacing the overall bank credit growth of approximately 15 percent. The RBI has noted this trend and has stepped in to address the potential risks associated with the rapid expansion of unsecured credit.

Credit Card Surge and Personal Loan Increase

Credit card outstandings among Indian consumers surged by 30 percent in the 12 months leading up to August of this year. This surge is attributed to the enthusiastic spending of the middle class, who purchased expensive items such as phones, televisions, refrigerators, and even indulged in more vacations, all facilitated by credit cards. Simultaneously, unsecured loans, including personal loans, saw a significant uptick during the same period, resulting in a notable increase in the total outstanding in the personal loans category.

RBI Data and Concerns

Data from the RBI indicates that the total outstanding in the personal loans category, covering education, vehicle, and housing loans, reached Rs 47.7 lakh crore as of August 25, 2023. This represents a 17 percent increase since March 31, 2023, and an impressive 31 percent increase compared to August 2022. The exponential growth in unsecured loans has raised questions not only about consumer confidence but also about the actual growth trajectory of the Indian economy.

RBI Tightens Norms: RBI’s Response and Increased Risk Weights

Governor Shaktikanta Das, in a recent warning, cautioned non-banking financial companies and others against reckless unsecured loans. Subsequently, the RBI has taken concrete steps by increasing the risk weights by 25 percent on unsecured consumer loans and banks’ exposure to NBFCs. This essentially mandates banks and NBFCs to allocate more capital to support these unsecured loans, aiming to mitigate associated risks.

Industry Perspective on Unsecured Loans

Industry experts note that post-Covid-19, banks, NBFCs, and fintechs have adopted an aggressive lending approach in the unsecured space. This includes promoting personal loans, particularly those of low value and short-term duration, as well as encouraging multiple loans. The RBI’s move to increase risk weights is seen as a response to the emerging credit risk in certain products and geographies, as observed in select banks, NBFCs, and comments from entities like Paytm.

Exemptions and Considerations

The RBI has wisely exempted housing loans, education loans, and vehicle/gold-backed loans from the increased capital requirement. This strategic move considers the financial burden already faced by consumers, with nearly a 20 percent increase in equated monthly instalments (EMIs) on some of these loan categories. The RBI’s action aligns with its effort to strike a balance between risk mitigation and easing the financial burden on consumers.

Impact on Personal Loan Costs

As a direct consequence of the RBI’s measures, the cost of obtaining a personal loan is expected to rise. Both NBFCs and banks are likely to adjust their rates to reflect the increased risk weights. However, the timing of these measures aligns with the conclusion of the festival season buying, providing a buffer for consumers. Caution is advised when considering loans, especially in a post-festival period.

Conclusion

RBI tightens norms in response to the rising tide of unsecured credit reflects a commitment to ensuring the stability of the banking system. While this may result in increased costs for personal loans, it is a timely intervention to address potential risks and foster responsible lending practices. Consumers are encouraged to exercise prudence and explore the implications of these measures before embarking on any new credit commitments.

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