Following weeks of warning lenders about the spike in unsecured personal loans, the Reserve Bank of India intervened on Thursday to make it more expensive for banks and non-banks to lend to this segment by requiring them to set aside additional capital.
The risk weight on consumer credit was raised by the RBI on Thursday from 100% to 125%, a quarter increase. This implies that banks will now need to retain Rs 11.25 in capital instead of the previous requirement of Rs 9 for every Rs 100 they lent.
The regulator also increased the risk weight on credit card receivables and bank loans to NBFCs, whose risk weight is below 100%. This directive will increase the cost of bank borrowing for top-rated finance companies but will exclude NBFCs that lend to priority sectors like housing and small and medium enterprises.
The move will not affect home, auto or education loans, RBI said, but clearly expressed its displeasure at some of the loans that are being offered.
While bank credit growth has increased by around 20%, retail loans have jumped 30%. Within this, credit card outstanding payment is estimated to have risen by around 30%.
Banks have also been lending to non-bank finance companies that are offering unsecured and personal and consumer loans.
The Reserve Bank of India has tightened norms for unsecured personal loans by increasing risk weights by 25 percentage points.
However, certain consumer loans such as housing, education, and vehicle loans are exempt from these revised norms.
Loans secured by gold and gold jewellery will continue to have a 100% risk weight.
The increase in risk weights means that banks will need to set aside more money as a buffer for unsecured personal loans, which in turn restricts their lending capacity.
The move comes as the RBI aims to address the high growth in consumer credit and the increasing dependency of NBFCs on bank borrowings.
The Reserve Bank of India (RBI) has increased the risk weight on consumer credit, including unsecured personal loans and credit card receivables, making it costlier for banks and non-banks to lend in these segments.
The move aims to ensure that finance companies improve their capital buffers and manage potential asset quality risks.
While the new norms may push up lending rates for borrowers, exclusions for priority sectors like housing and small and medium enterprises will mitigate the impact on certain non-banking finance companies.
When you apply for loans with multiple banks, it can affect your credit score.
Credit inquiries, which occur when banks check your credit score, can lower your score by a few points. There are two types of inquiries: hard inquiries, which involve obtaining your credit report, and soft inquiries, which are more routine. Hard inquiries can stay on your report for over two years.
However, interest rate shopping within a short period of time typically improves your credit score, while applying for different types of loans outside of this period can be a red flag.