In a recent development, the Reserve Bank of India (RBI) has introduced crucial changes to the risk weightage for consumer loans provided by commercial banks and Non-Banking Financial Companies (NBFCs). This alteration, highlighted in a recent circular, has far-reaching implications for borrowers, shaping the landscape of unsecured loans and impacting credit accessibility. Here’s a breakdown of the key changes and their implications:
Detailed Changes in Risk Weight:
For Credit Card Bills: The risk weight for notified commercial banks has been increased from 125% to 150%, and for NBFCs, it’s up from 100% to 125%. Loans from Banks to NBFCs: The risk weight on loans given by banks to NBFCs has been raised.
Impact on Loans:
Costlier Unsecured Loans: Following RBI’s move, banks and lending institutions will need to hold more capital for unsecured loans, potentially leading to increased interest rates. No Effect on Certain Loans: Loans like housing, education, vehicle, and gold loans are expected to remain unaffected.
Loan Accessibility Might Get Tougher:
Stringent Loan Approvals: Obtaining personal loans, credit cards, and consumer durable loans might become more challenging and expensive. Stricter Norms: These categories might see tighter rules for loan approval.
Smart Borrowing in the New System:
Wise Borrowing: Adil Shetty, CEO of Bankbazaar, advises borrowing only as much as one can comfortably repay every month, avoiding spending more than 25-30% of the credit card’s total limit. Thorough Research Before Applying: Prospective borrowers should thoroughly research before applying to avoid multiple rejections, which could negatively impact their credit score.
Tips for Loan Applicants:
Compare Offers: Naveen Kukreja advises comparing interest rates from different banks and NBFCs before applying. Start with Existing Relationships: Engage first with institutions where you already have accounts or previous loans. Online Financial Platforms: Use online platforms for a comprehensive comparison of different lenders. Consider Secured Loans: If unsecured loans are difficult to obtain, Adil Shetty suggests opting for secured loans against fixed deposits or gold, which might attract lower interest rates.
Improving Credit Profile:
Stable Income and High Credit Score: Individuals with stable income and a credit score above 750 are likely to get loans easily. For Lower Credit Scores: Those with lower scores should focus on timely payments and improving their credit profile.
Increasing Credit Limit:
Leveraging Higher Credit Scores: As your credit score improves, you can request an increase in your credit card limit, useful in emergencies or for converting large expenses into EMIs. With the RBI’s new regulations, borrowers need to be more prudent and informed while applying for loans. By comparing offers, improving credit profiles, and opting for secured loans if necessary, individuals can navigate these changes effectively. Remember, smart borrowing is the key in this new financial landscape!
