RBI’s tightening loan norms will not impact borrowers in near-term

From the perspective of the common borrower, what is more apparent is that the days of easy credit may be gone.

The Reserve Bank of India (RBI) has been concerned about the surge in unsecured consumer loans – personal loans and credit card loans - for some time now. With its latest circular requiring banks and non-banking finance companies (NBFCs) to increase risk weights on such loans and also limit their exposure to them, the RBI is pushing lenders to put a lid on the rapid growth in this segment.

Data from the RBI shows that personal loans grew at 23 percent in August 2023 and credit card outstanding at 30 percent, compared to August 2022.

Higher risk weights mean that banks and NBFCs will have to set aside more capital for every such loan they extend. To put it simply, this will ensure that if borrowers fail to repay their loans, the banks shouldn’t get into trouble. The lenders will also have to adhere to limits on exposure to different segments of consumer credit as approved by their boards. And, top up loans backed by depreciating assets (as in the case of say, car loans) will now have to be treated as unsecured loans.

The big questions are: will the RBI move make it tougher for you to get a personal loan? What about the likelihood of banks reducing their customers’ credit card limits? And, what about a possible increase in interest rates on all such loans?

No immediate impact on rates

According to Shibani Kurian, Senior Executive Vice- President & Head Equity Research, Kotak Mutual Fund, this may not result in higher interest rates immediately. “While the increase in risk weights is likely to impact growth in these segments, currently, most large banks and NBFCs are well-capitalized and have capital in excess of what is required under regulatory requirements. Hence, banks may not need to raise capital as of now because of the higher risk weights. So, banks will evaluate the impact and then decide whether any cost increase needs to be passed on to the customer.”

Also Read: Why RBI cracking whip on consumer loans is no surprise

Joydeep Sen, Corporate trainer (Financial Markets) agrees and says, while there may not be an immediate impact on the cost for banks, in the long run banks will be more wary than before.

Furthermore, as Naresh Malhotra, a former SBI executive and currently Director at JCRC LLP, an accounting firm, highlights, it is the NBFCs that are likely to be impacted more, as their funding costs will go up. “NBFCs borrow from banks to lend to the final customer. With the rise in risk weights, their cost of borrowing from banks or through bond issuance etc., will rise. But the final impact will depend on the resource mix and the share of unsecured consumer loans in an NBFC’s overall portfolio.”

Commenting on banks, he says that although, the unsecured loan portfolio of commercial banks too, has risen at a rate higher than the general credit growth rate, their exposure to this segment is better hedged than the NBFCs. "Higher capital outlay, however, will affect them also," says Malhotra.

The RBI has raised the risk weights on unsecured consumer credit (existing as well as new) such as personal loans from 100 percent to 125 percent – for both banks and NBFCs. The risk weights for credit card receivables have been raised from 125 percent to 150 percent for banks and from 100 percent to 125 percent for NBFCs.

Also read: Now, lenders to inform borrowers while reporting their loan defaults to credit bureaus

Days of easy credit to go?

From the perspective of the common borrower, what is more apparent is that the days of easy credit may be gone. Ritesh Srivastava, Founder and CEO, FREED, a debt relief platform says that overall lenders have already turned more hawkish and conservative in approving new loan applications. “New loan approval rates stand at around 4 to 5 percent compared to 8 to 12 percent in the peak of the cycle.”

According to Malhotra, the RBI has been apprehensive about the sharp growth in unsecured credit. As a result, the central bank is making it costlier for banks and NBFCs to give loans as it certainly wants this growth to slow down. Kurian too, talks about how the higher capital requirements will gradually cool down the competitive intensity in the consumer credit space where banks, NBFCs and fintechs (tie-up with regulated entities) have been jostling to add more and more customers.

Sen offers another perspective. He says, "In unsecured loans, even when there are delinquencies, banks are able to make up for them as the interest rates are high. But what this (higher rates) does in effect is, those paying up their credit card dues land up making up for those who are not. This is called good money for bad money. Hence, more due diligence is required. The higher risk weights will help with that."

This can work to the benefit of those with a regular source of income and good credit scores. While those with intermittent incomes and poor credit scores may find it even tougher to get a loan. Adhil Shetty, CEO, BankBazaar.com, says, “For the ideal borrower, that is, someone with stable income, a credit score over 750, and a track record for timely payments, there will be no impact on their existing or new credit lines. Lenders will prefer to do business with such a borrower. Anyone outside these parameters might find it tougher to borrow, but that's always been the case.”

Also read: Explained: Key Fact Statement of a loan and why it is important

Impact on credit cards

Experts we spoke with see no immediate impact - such as reduction in credit card limits or higher interest rates - on credit cards.

Malhotra emphasizes that it is the credit card outstanding that remains unpaid even after the due date which is a bigger source of risk, and that’s what must be focused on. Kurian throws more light on this. While credit spends have been growing at a fast clip, she says that from a delinquency point of view, there has been no deterioration. “Revolve rates (indicates how much outstanding credit card balance that remains unpaid) today are lower than what they were in the pre-Covid period. So, banks are not facing any asset quality issues here and any immediate reduction in credit card limits is unlikely.”

Going forward, banks and NBFCs may, however, start focussing more on customers with better credit profiles, thereby, causing the fast-paced growth witnessed so far, to taper. “Existing credit card customers that repay only minimum dues are expected to face tighter credit limits and possibly a downward revision in limits upon renewals,” says Srivastava.

That said, according to Naveen Kukreja, Co-Founder and CEO, Paisabazaar, for lenders with adequate capital and right risk management, credit cards and unsecured loans would remain the most profitable loan segments and would continue to be focus areas.