Personal Loan Interest Rates Likely To Get Costlier As RBI Tightens Lending Rules

At a time when loan borrowers are already digging their pockets deep ever since RBI started hiking the repo rate last year, more trouble seems to be in store for them after RBI's latest move.

What Has The RBI Announced?

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The Reserve Bank of India (RBI) on Thursday increased the risk weights for consumer credit exposure, including personal loans, by 25 percentage points to 125 percent. This means that earlier banks needed to maintain a capital of Rs 9 for every Rs 100 they loaned, but now they will have to keep Rs 11.25. The hike in risk weight implies that banks and NBFCs will need to set aside a higher amount of capital for these loans, leading to an increase in the cost of capital.

Which Loans Will Be Impacted?

This adjustment, as per the RBI's guidelines, applies to both existing and new personal loans. However, it excludes housing loans, education loans, vehicle loans, loans secured by gold and gold jewellery, and microfinance loans. Typically, commercial banks and non-banking financial companies (NBFCs) face a risk weight of 100 percent for loan exposures, as per the Business Standard report. Click here to read the RBI's circular.

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Also Read: Explained: Why Your Loan Application Can Be Rejected Despite High Income

How Will The Move Impact Interest Rates?

A hike in risk weights may lead to higher interest rates and reduced access to credit for consumers as banks adjust lending practices to meet increased capital requirements. This could impact borrowing costs and limit the availability of loans.

Personal loans, easily accessible with a respectable credit score, serve various purposes, from consolidating high-interest debts and providing emergency funding for unexpected expenses to financing major purchases, covering education expenses, and even supporting entrepreneurial initiatives. However, with the rise of lending apps, there has been concern regarding a sharp rise in personal loans.

Analysts expect the new norms to make personal loans and credit cards costlier and may curb growth in these categories.

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When The RBI Governor Hinted About The Move

The RBI's move to tighten norms on personal loans follows concerns raised by RBI Governor Shaktikanta Das last month regarding the rapid growth in consumer credit and the rising reliance of NBFCs on bank borrowings, as per the report.

¡°Certain components of personal loans are, however, recording very high growth. The Reserve Bank is closely monitoring these for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interests. The need of the hour is robust risk management and stronger underwriting standards,¡± said Governor Das in his October monetary policy address.

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