New Delhi: After the Reserve Bank of India (RBI) tightened personal loan rules, 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.
The RBI has raised the risk weight for unsecured loans by 25%, bringing the risk weight for consumer loans to 125%. Previously, banks needed to keep Rs 9 in capital for every Rs 100 loaned out, but now they need to reserve Rs 11.25. Additionally, the risk weight for bank-issued credit card loans is now 150%, while non-banking financial companies (NBFCs) will see their risk weight increase to 125% from the previous 100%.
Effects 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 of 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.
