In a significant move, the Reserve Bank of India (RBI) has raised concerns over the soaring levels of unsecured personal loans, signaling potential consequences for borrowers. The central bank’s intervention aims to curb the rising trend in personal loans, including credit card outstandings, amidst a growing financial landscape. Let’s delve into the details of this development and its potential impact on borrowers.
The Warning Signs: Surge in Unsecured Personal Loans
As of September 2023, credit card outstandings witnessed a staggering 30% Year-on-Year surge, reaching Rs 2.17 lakh crores. Simultaneously, other forms of personal loans have surged by 25%, totaling Rs 12.4 lakh crores. Recognizing the rapid growth in unsecured personal loans, the RBI has issued warnings to lenders, expressing concerns about potential risks associated with this surge.
Shift in Lending Focus: From Corporate to Retail
Banks, facing a lack of corporate demand, have shifted their lending focus to the retail sector and Non-Banking Financial Companies (NBFCs). While the overall default rates have seen a decrease from the previous year, certain segments of unsecured loans are showing signs of stress.
RBI’s Response: Tightening the Reins
To address the escalating credit growth and associated risks, the RBI has employed a strategic tool – raising risk weightage. The risk weight on consumer credit has been increased from 100% to 125%, representing a significant shift. This adjustment translates into higher capital requirements for lenders, making borrowing more expensive and slowing down the pace of growth. This move particularly affects NBFCs, posing a dual challenge of increased costs and more stringent lending conditions.
Impact on Borrowers and Sectors:
- Consumer Credit: The risk weight on consumer credit has seen a 25% increase, resulting in higher capital retention requirements for banks.
- NBFCs and Credit Card Receivables: The risk weight on bank loans to NBFCs and credit card receivables has been elevated, affecting finance companies by increasing costs.
- Priority Sectors: Loans related to housing, automobiles, and education, considered priority sectors, remain unaffected by these changes.
