Banks and Lenders Rethink Personal Loan Portfolios Amid Regulatory Changes

Banks and non-bank lenders are reviewing their personal loan portfolios, which could lead to a decrease in the proportion of personal loans within their overall co-lending assets under management. This reassessment comes in response to the Reserve Bank of India’s decision to raise the risk weight on unsecured consumer credit from 100% to 125%, prompting strategic adjustments in the financial sector.

Under co-lending arrangements, banks and NBFCs (Non-Banking Financial Companies) collaborate to provide loans to the priority sector, sharing the risk in an 80:20 ratio. This model enables smaller NBFCs to access bank funding efficiently, while banks gain access to niche customer segments and geographies.

According to a report by CRISIL Ratings, NBFCs’ co-lending assets under management have exceeded Rs 1 trillion, with personal loans making up a significant portion. However, the growth of personal loans in co-lending arrangements is expected to slow down due to the increased risk weight.

The focus is shifting towards secured loans dominating the co-lending business mix, reflecting a preference for lower-risk lending options. Banks may reduce exposure to certain products under this model, favoring secured loans over personal loans due to limited familiarity between lenders.

The RBI’s revised risk weight encourages lenders to adopt a more selective approach to credit, emphasizing secured loans and business partnerships. While secured loans have lower delinquency rates, scaling secured lending presents challenges in collateral evaluation and management.

Despite the complexities, NBFCs are likely to increase the share of secured loans in their asset portfolios to align with regulatory guidelines and mitigate risks associated with unsecured lending. This strategic shift underscores the evolving landscape of lending practices in response to regulatory changes.