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Cost Hike Alert: India Braces For Pricier Personal Loans Post RBI's Regulatory Move

In a bid to enhance financial prudence, the Reserve Bank of India (RBI) has introduced stringent measures impacting unsecured personal loans in the country. The regulatory move aims to instil caution among banks and Non-Banking Financial Companies (NBFCs) by increasing the risk weight assigned to unsecured consumer credit.

Risk Weight Hike
The RBI has mandated a significant 25 percentage point increase in the risk weight for unsecured consumer loans. Previously, banks were required to maintain capital of Rs 9 for every Rs 100 loaned; now, this ratio has been elevated to Rs 11.25. This adjustment forces lenders to set aside more funds as a safety net, potentially leading to higher costs associated with unsecured personal loans. Essentially, the higher risk weight acts as a restraint on banks' lending capacity in this segment.

Exclusions and Impact on Specific Loan Categories
However, it's important to note that the new regulations do not apply to housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. These categories remain unaffected by the heightened risk weight, providing a certain level of relief for borrowers in these segments.

Education, Housing, and Other Loans Unaffected
The RBI's decision to exclude housing loans, education loans, and others from the increased risk weight demonstrates a targeted approach. This move reflects the central bank's focus on specific areas of concern within the consumer credit segment. In particular, RBI Governor Shaktikanta Das had recently expressed apprehensions about the rapid growth observed in this sector.

Credit Cards Bear the Brunt
The impact extends to credit card receivables as well, with the risk weights on credit card exposures being raised by 25 percentage points. Banks and NBFCs now face risk weights of 150 per cent and 125 per cent, respectively, on credit card portfolios. This adjustment underscores the RBI's commitment to addressing high growth within certain components of consumer credit.

Governor's Call for Vigilance
RBI Governor Shaktikanta Das has not only implemented these measures but also urged banks and NBFCs to strengthen their internal surveillance mechanisms. The central bank emphasises the importance of addressing risks proactively and implementing suitable safeguards within these financial institutions.