In the year 2023, the Reserve Bank of India (RBI) implemented adjustments to the risk weights associated with various loan categories, including credit cards, personal loans, consumer durable loans, and loans to non-banking financiers. This strategic move was made to regulate and mitigate the risks associated with excessive lending in these segments.
Subsequently, financial institutions such as banks and Non-Banking Financial Companies (NBFCs) are now required to uphold heightened capital reserves specifically designated for these categories. For instance, the risk weight concerning every Rs 100 in personal loan receivables underwent modification.
With this adjustment to 125 percent, the risk-weighted assets now amount to 125 percent of Rs 100, equating to Rs 125. Consequently, the increase in the capital requirement is calculated as Rs 11.25 minus Rs 9, resulting in Rs 2.25 for every Rs 100 in personal loan receivables, reflecting a 20 percent increment. This necessitates that banks allocate additional funds, thereby reducing the overall amount available for lending.
Despite these measures, the year 2023 witnessed a notable 18 percent year-on-year (YoY) growth in retail lending. Unsecured lending, characterized by loans not backed by collateral, continued to exhibit significant expansion. Personal loans and credit card spending demonstrated robust growth at 22 percent and 28 percent, respectively, based on the latest Reserve Bank of India (RBI) sectoral credit growth data report. This report encapsulates retail credit trends from the past year and provides insights into expectations for 2024.
Interestingly, high-interest rates and elevated inflation failed to dampen the demand for credit during this period.
A pivotal development in 2023 was the RBI’s proactive intervention in curbing unsecured and small-ticket loans. This strategic move is perceived as the central bank’s effort to preemptively manage the potential excess growth of small loans before any deterioration in asset quality occurs in this category.
Adhil Shetty, Chief Executive Officer (CEO) of BankBazaar.com, expresses optimism for 2024, anticipating a potential easing of inflation levels and subsequent cooling of interest rates. He suggests that as interest rates decrease, loans may become more affordable. However, the tweak in the RBI’s risk weights is expected to restrain high-risk, small-ticket lending. While prime borrowers are likely to continue receiving favorable loan offers, subprime borrowers may face increased challenges as lending to the risky segment tightens.
Personal loans grew 22 percent, but ticket size declines
As per the study of personal loan trends in BankBazaar’s Moneymood 2024 report, the average personal loan ticket size had been declining since 2019; the trend continued in 2023.
According to the report, while personal loans grew by 22 percent YoY, buoyed by global and local demand and a steady supply of innovative products that allowed customers to access small-ticket loans, the recent increase in risk weights for personal loans has made them more expensive and harder to get.
Shetty expects that in 2024, the unsecured loan landscape will change and adapt to the RBI’s new rules. Well-capitalised lenders will do well, but stressed lenders will struggle. “The demand, especially for small-ticket loans, will remain high. At the same time, the higher risk weights are going to have an impact on how fast unsecured loans grow as small-ticket loan providers become more cautious,” says Shetty.
The top four categories of loans account for 92 percent of the debt namely Personal, House loans, Credit Card loans, and Auto loans.
Home loan growth was slower compared to last year
According to the BankBazaar Aspiration Index, in 2023 home ownership continued to be one of the top three goals. The demand for home loans continued its upward trajectory despite higher interest rates, and the loan book of banks grew above Rs 21 lakh crore. However, growth was slower compared to last year (refer to graphic), and loan ticket sizes continued to rise. In 2023 — the average home loan ticket size disbursed on Bankbazaar was Rs 28.19 lakh. For metros, the average home loan ticket size was Rs 33.10 lakh, and for non-metros, it was Rs 22.81 lakh.
According to the report, in 2024, if inflation eases, an interest rate reversal could take the housing market to new heights. The falling rates will help all borrowers.
Co-brands and collaborations to drive credit card growth
As per credit card spending trends in the report, the number of credit cards outstanding crossed 94.7 million in October 2023. In tandem, credit card spends surged to record levels, hitting Rs 1.79 lakh crore. Average spend per card grew to Rs 5,577 from Rs 5,052 last year in the Diwali month — an increase of 10.4 percent YoY
The report indicates a 22 percent YoY growth in personal loans, driven by global and local demand, along with innovative products facilitating access to small-ticket loans. However, the recent elevation in risk weights for personal loans has increased their cost and accessibility challenges.
Looking ahead to 2024, Shetty anticipates shifts in the unsecured loan landscape, adapting to the RBI’s updated regulations. Strongly capitalized lenders are poised for success, while those facing stress may encounter difficulties in this evolving scenario.
