In a move to address the surge in unsecured loans, the Reserve Bank of India (RBI) has implemented significant changes that are poised to impact the landscape of personal loans in 2024. The increase in risk weight on consumer credit, from 100% to 125%, has far-reaching implications for both lenders and borrowers. This explainer delves into the reasons behind this decision, its effects on lending costs, and what borrowers can anticipate in terms of interest rates and loan accessibility.
Why are personal loans expected to become more expensive in 2024?
The Reserve Bank of India (RBI) has increased the risk weight on consumer credit from 100% to 125% in response to a surge in unsecured loans in recent years. This move is anticipated to raise the cost of unsecured lending.
What is the risk weight on consumer credit, and how does it impact lending costs?
A risk-weighted asset is a measure used by banks to assess the risk associated with assets, including loans. The higher the risk weight, the more capital a lender must maintain to cover its credit risk. In this case, the RBI’s increase in risk weightage means that lenders will need to maintain higher capital reserves for riskier consumer credit. This results in a higher cost of funds for lenders, leading to increased lending rates.
How does this change affect banks and non-banking financial companies (NBFCs)?
For every Rs 100 in personal loan receivables, the risk-weighted assets were 100% of Rs 100. With the new rule, the risk-weighted assets are 125% of Rs 100. This requires banks to set aside a higher capital reserve, leading to an increase in capital requirements. While well-capitalized banks may absorb the impact, others are likely to pass on the cost to borrowers. NBFCs, which typically borrow from banks, may face a moderation in bank lending and a slowdown in lending due to increased capital buffer requirements.
How will interest rates on personal loans be affected, and by how much?
The increase in risk weightage is expected to make small-ticket personal loans more expensive, particularly those offered by NBFCs. This could result in higher interest rates or tighter eligibility criteria for borrowers. The rate hike is likely to be more pronounced in smaller ticket-size loans of less than Rs 50,000, with estimates ranging from a 0.20% to 1.5% increase depending on loan components and lenders.
Will obtaining personal loans become more difficult?
Yes, getting a personal loan is expected to become more challenging. The increased risk weights on unsecured loans may make lenders more cautious, leading to stricter eligibility criteria and a more rigorous assessment process for loan approvals. Customers with higher risk profiles may face delays or end up paying higher interest rates. Those opting for small-ticket loans may experience more scrutiny, and lenders could downsize their exposure to small-ticket loans.
How will borrowers be impacted by these changes?
Borrowers may face higher interest rates, especially for small-ticket loans. Stricter eligibility criteria and a more rigorous assessment process could lead to delays in obtaining loans. Customers with disciplined credit behavior and solid credit scores may still secure good deals, but those with lower credit scores and a poor credit history may find it more difficult to access loans.
