New RBI norms to make personal loans costlier: Check rates of top lenders

The Reserve Bank of India (RBI) on Thursday increased the risk weights for consumer credit exposure, including personal loans, by 25 percentage points to 125 per cent. This means that  earlier banks needed to maintain capital of Rs 9 for every Rs 100 they loaned, but now they will  have to keep Rs 11.25.

The hike in risk weight implies that banks and NBFCs will need to set aside a higher amount of capital for these loans, leading to an increase in the cost of capital.

This adjustment applies to both existing and new loans. However, it excludes housing loans, education loans, vehicle loans, loans secured by gold and gold jewellery, and microfinance loans. Typically, commercial banks and non-banking financial companies (NBFCs) face a risk weight of 100 per cent for loan exposures. 

 

A hike in risk weights may lead to higher interest rates and reduced access to credit for consumers as banks adjust lending practices to meet increased capital requirements. This could impact borrowing costs and limit the availability of loans.

Here is a list compiled by Paisabazaar.com of interest rates and other charges for leading banks as of November 15: 

 

Personal loans, easily accessible with a respectable credit score, serve various purposes, from consolidating high-interest debts and providing emergency funding for unexpected expenses to financing major purchases, covering education expenses, and even supporting entrepreneurial initiatives. However, with the rise of lending apps, there has been a concern regarding a sharp rise in personal loans. 

Analysts expect the new norms to make personal loans and credit cards costlier and may curb growth in these categories.

“This is negative for the entire sector as it takes away the growth multiple and would increase Cost of Funds (CoF) for NBFCs. Channel checks and the RBI’s FSR suggest that non-SBI PSU banks have high NPLs on unsecured loans even with small exposures," according to Nuvama Institutional Equities.

Rating agency Icra also believes the norms will push up lending rates for borrowers.

The RBI's move to tighten norms on personal loans follows concerns raised by RBI Governor Shaktikanta Das regarding the rapid growth in consumer credit and the rising reliance of NBFCs on bank borrowings. 

“Certain components of personal loans are, however, recording very high growth. The Reserve Bank is closely monitoring these for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards,” said Das In his October monetary policy address.