Personal loan rules: After the tightening of personal loan rules by the Reserve Bank of India (RBI), all banks and non-banking financial companies (NBFCs) have prepared to increase interest rates.
Banks say that the new rules will affect the demand for consumer loan products. In the bankers’ meeting, a decision on increasing personal loan rates can be taken in a day or two. RBI has recently increased the risk weight of unsecured loans by 25 percent. With this step, the risk weight in case of consumer loans has increased to 125 percent.
This means that whereas earlier banks were required to maintain Rs 9 of capital for every Rs 100 of loans, now they will have to maintain Rs 11.25. At the same time, credit card loans for banks will have a risk weight of 150 percent, while receipts by NBFCs will have a risk weight of 125 percent, which was earlier 100 percent.
Impact on customers
The increase in risk weight simply means that banks will have to set aside more money as a buffer while giving personal loans. This will limit the ability of banks to give loans. Interest rates will remain high as demand for loans increases. In the current banking system, 83 percent of personal loans are given to existing customers of banks.
How much increase is possible
At present, different banks are charging interest ranging from 10 percent to 30 percent depending on the tenure on personal loans. It is believed that an increase of one to one and a half percent may be seen in this.
What do banks say
The immediate impact of the increased risk weight will be that banks will require additional capital, SBI economists said. We estimate that the banking industry will require additional capital of Rs 84,000 crore.
At the same time, credit rating agency S&P Global says that the Reserve Bank’s decision is likely to reduce the capital adequacy of banks by 0.6 percent. The agency says this will increase interest rates on loans, reduce credit growth and increase the need to raise capital for weak financial institutions.
At present, home loan, car loan and education loan will not be affected by this step of RBI. However, stricter loan norms may impact NBFCs more. They offer unsecured personal and consumer loans.
