- By Shreya Shrivastava
- 18th January, 2024
- Banking
Personal loans are poised to become more expensive in the coming year, and accessing them from non-banking financial companies (NBFCs) might become more challenging due to recent rule changes instituted by the Reserve Bank of India (RBI). In response to a substantial increase in unsecured loans over the past few years, the RBI has opted to raise the risk weight on consumer credit from 100% to 125%. Moreover, the central bank has mandated that all regulated entities comply with these new rules by February 29, 2024. This adjustment is anticipated to elevate the cost of unsecured lending, posing potential challenges for borrowers, particularly those seeking smaller loans.
The move by the RBI is driven by concerns related to the surge in unsecured loans, which are loans not backed by collateral. Personal loans fall under this category, and their popularity has been on the rise due to their accessibility and quick processing. However, this surge has raised red flags for regulators, prompting them to reevaluate the risk associated with unsecured lending.
One key change introduced by the RBI is the increase in the risk weight on consumer credit. Risk weight is a mechanism used by regulators to determine the capital that banks or financial institutions must set aside to cover potential losses on loans. By raising the risk weight from 100% to 125% for consumer credit, the RBI is essentially signaling that these loans are now considered riskier, requiring banks and NBFCs to hold additional capital as a buffer.
This adjustment in risk weight is expected to have a direct impact on the cost of providing personal loans. With higher risk weights, financial institutions will need to allocate more capital for each unit of personal loan they extend. To maintain profitability, these institutions are likely to pass on the increased cost to borrowers in the form of higher interest rates. This is why analysts anticipate personal loan interest rates to rise by up to 1.5% in the near future.
The change in risk weight not only affects the cost of personal loans but also has implications for loan eligibility. As financial institutions gear up to comply with the new rules, there is a possibility that they may adopt more stringent eligibility criteria for personal loans. This could make it more challenging for certain individuals, especially those seeking smaller loans, to qualify for personal financing.
Small loan borrowers, who often rely on quick and accessible personal loans for various needs, might face hurdles due to the tightening of loan eligibility norms. This could impact individuals looking for funds to meet immediate financial requirements, such as medical expenses, education fees, or unforeseen emergencies. The potential impact on small loan borrowers underscores the broader consequences of regulatory changes on the ground level of consumer finance.
The timeline set by the RBI for compliance, with the new rules coming into effect by February 29, 2024, adds a sense of urgency for financial institutions to adapt their lending practices. It also implies that borrowers may start experiencing the effects of these changes in the relatively near term.
While the RBI’s regulatory measures aim to address concerns related to the risk associated with unsecured lending, it also raises questions about the potential consequences for the overall economy. Personal loans play a crucial role in consumer spending, and any significant change in the availability and affordability of such loans can have ripple effects on various sectors.
For borrowers, it becomes imperative to stay informed about these regulatory changes and their potential impact on personal finance. Those considering personal loans in the coming months should be prepared for the possibility of higher interest rates and more stringent eligibility criteria. Exploring alternative financing options and understanding the changing landscape of personal lending will be essential for making informed financial decisions.
In conclusion, the RBI’s rule changes regarding personal loans signal a shift in the regulatory approach towards unsecured lending. The increase in risk weight on consumer credit is expected to lead to higher costs for personal loans, potentially impacting the affordability and accessibility of such financing. As financial institutions adjust to comply with the new rules, borrowers, especially those seeking smaller loans, may face challenges in meeting tightened eligibility norms. It remains to be seen how these regulatory changes will unfold and their broader implications for the personal finance landscape in India.
