RBI’s Risk Weight Hike: Impact on Unsecured Personal Loans

Following the Reserve Bank of India’s (RBI) decision to increase the risk weight on unsecured lending, including credit card receivables by banks and non-banking finance companies (NBFCs), borrowers are likely to face higher equated monthly installments (EMIs). The interest rate hike will be more pronounced for individuals with a credit score below 750, potentially leading to stricter terms and conditions for obtaining credit cards or personal loans.

Current Interest Rates and Implications

Currently, interest rates on personal loans range from 10.5% to 17%, while credit card rates vary between 36% to 45%. The elevated risk weight may prompt lenders to reduce the supply of unsecured loans, particularly those perceived as higher risk, as they will need to allocate more capital to cover these loans.

Impact on Borrowers and Lenders’ Response

Individuals seeking personal loans may find it challenging to secure favorable terms, and even eligible borrowers may face increased scrutiny. Lenders, especially those with a higher exposure to unsecured advances, are expected to recalibrate their priorities, potentially impacting borrowers with elevated costs.

Expert Perspectives and Competitive Market Dynamics

Adhil Shetty, CEO of Bankbazaar.com, notes that banks with significant exposure to unsecured loans may react more sharply. However, the competitive market may drive lenders to explore various channels, including retail investors, to acquire low-cost funds.

Online Lending Apps and Supply of Unsecured Loans

Online lending apps may respond to the altered risk weight by increasing interest rates to maintain profitability in the competitive market. Borrowers are advised to stay informed about any changes and regularly review their financial situation for informed decisions.

Impact on NBFCs and Credit Cards

The RBI’s measures could potentially reduce the supply of unsecured loans by NBFCs and credit cards, depending on how banks reassess their strategies in response to the risk weight adjustment.

In conclusion, the RBI’s move is expected to have widespread implications, influencing interest rates, loan availability, and borrower eligibility in the unsecured lending landscape. Borrowers are urged to stay vigilant and informed about evolving market dynamics.

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