Explained: Here's Why Taking Personal Loans Is Going To Get Tougher & Costlier In 2024

At a time when loan interest rates in India are already pinching our pockets due to RBI's back to back rate hikes in the last two years, a new rule by RBI is set to hurt you more. Not only are loans set to get costlier, but also tougher to get approved.

Vanya GautamUpdated: Jan 17, 2024, 17:12 IST
3 min read
Loan Interest Rates Likely To Get Costlier As RBI Tightens Lending Rules
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At a time when loan interest rates in India are already pinching our pockets due to RBI's back to back rate hikes in the last two years, a new rule by RBI is set to hurt you more. Not only are loans set to get costlier, but also tougher to get approved.

What Are RBI's New Rules For Loans?

personal loans to get costlier personal loans to get costlier/getty

Also Read: How A Good Credit Score Can Help You Save Lots Of Money

As per a recent rule change by the Reserve Bank of India (RBI), personal loans are all set to get costlier this year. After noticing a rampant surge in the applications and approval of unsecured loans in the last few years, the RBI has decided to increase the risk weight on consumer credit from 100% to 125%.

So, earlier, for every Rs 100 lent as personal loan, the risk weight required to be maintained, was 100%, which is equal to Rs 100 here. But with the new RBI rule, the risk-weightage is 125% of Rs 100, i.e. Rs 125.

This will increase the cost of unsecured lending for lenders such as banks and NBFCs. You might be wondering how? Let us break it down for you.

As per RBI, all lenders are required to hold capital in a certain proportion of the loan amount they lend. The riskier the loan, higher the capital a lender has to maintain. That is why, as a direct consequence of the RBI raising the risk weightage for personal loans, lenders will now have to maintain higher capital reserves for the riskier category.

Now you might be wondering what is a risk-weight and how is it going to impact your personal loan?

A risk-weight is the measure used to to assess the risk associated with loans. It helps lenders determine the minimum amount of capital that a lender needs to hold to cover its risk.

personal loans rbi rule personal loans rbi rule/axisbank

So, since personal loans are unsecured in nature, i.e. no collateral or security is required to be pledged to avail the loan, the risk weight for them tends to be higher. Moreover, to lend more, lenders will need to go to the market to raise more funds. And given that not one or two but in fact all RBI regulated lenders will face the same situation, there will be a rise in demand for fresh funds. This eventually will raise the cost of funds. And to offset this risen cost, lenders will charge higher interest rates from customers by lending personal loans at higher interest rates. This will pinch customers' pockets more through higher EMIs.

Also Read: 5 Rights You Must Know As A Loan Defaulter

When Does The Rule Come Into Effect?

RBI has asked all regulated entities to comply with the new rules on or before February 29, 2024.

How Much Will Interest Rates Go Up?

personal loans rbi rule change personal loans rbi rule change/shutterstock

While there is no single number to answer that, banking experts are estimating an increase of upto 1.5% on personal loan interest rates, depending on factors such as loan amount, borrower risk, chosen tenure, etc.

Why Loans Will Also Be Tougher To Get?

Besides the higher interest rates on the personal loans, the new RBI rules will also make it more difficult to get the loans. The increased risk weights on personal loans might make lenders more cautious, which could potentially lead to stricter eligibility criteria and that's why a more rigorous assessment process for loan approvals.

Also Read; Inside America's Smallest Bank That Has No ATM, No Fees & No Website

For the latest and more interesting financial news, keep reading Indiatimes Worth. Click here

21/11/2024 19:22:35
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