The Reserve Bank of India (RBI) has recently implemented measures to moderate the rapid growth in consumer lending. On Thursday, the RBI increased the risk weights for consumption loans, credit card exposures, and loans to non-banking financial companies (NBFCs) by 25 percentage points. This step is intended to encourage more cautious lending practices by increasing the capital requirements for these loans.
Financial experts and bankers anticipate that this move by the RBI will lead to higher borrowing costs for consumers. For example, personal loans from HDFC Bank, India’s largest private lender, are presently offered at interest rates between 10.5% and 25% for salaried individuals.
The RBI’s decision follows concerns about the swift expansion of consumer credit and the growing dependence of NBFCs on bank loans. These issues were also emphasized by RBI Governor Shaktikanta Das during meetings with major bank and large NBFC executives in July and August 2023.
Data from the RBI reveals that certain types of unsecured loans (those without collateral) have grown more rapidly than overall credit. Credit card debts saw a 30% year-over-year increase in September, other personal loans expanded by 25%, and consumer durable loans grew by 11%. In comparison, the total bank credit growth was recorded at 20% during the same period.
Prior to this increase, consumer credits from banks and NBFCs had a risk weight of 100%. Credit card dues from banks were weighted at 125%, while those from non-banks were at 100%. Bank loans to NBFCs were risk-weighted based on ratings from external credit assessment institutions. The new increase will affect both existing and new consumer loans.
Furthermore, the RBI stated that the risk weights for loans to NBFCs would now include an additional 25 percentage points above the externally assigned risk weight. This applies where the current risk weight for NBFCs is under 100% and does not include loans to mortgage lenders and NBFCs classified under the priority sector.
Housing loans, education loans, vehicle loans, and loans secured by gold and gold jewelry remain unaffected by the RBI’s measure.
The tightening of risk weight norms for consumer loans by the RBI is also expected to slightly raise corporate bond yields, as NBFCs might increase their borrowings from the market.
