RBI's Bold Move: Changes in Risk Weight Impact Personal Loans in 2024

In an effort to tackle the surge in unsecured loans, the Reserve Bank of India (RBI) has rolled out significant changes set to reshape the landscape of personal loans in 2024. The alteration involves increasing the risk weight on consumer credit from 100% to 125%, creating ripples for both lenders and borrowers. Here’s a breakdown of the reasons behind this decision, its effects on lending costs, and what borrowers can expect in terms of interest rates and loan accessibility.

This move comes as a response to the notable increase in unsecured loans. The risk weight on consumer credit, a measure used by banks to gauge risk associated with loans, has been raised by the RBI. This is likely to escalate the cost of unsecured lending.

In simple terms, the risk weight is a tool banks use to assess the risk linked with loans. With the recent change, lenders must maintain higher capital reserves for riskier consumer credit, leading to a surge in the cost of funds and subsequently higher lending rates.

For instance, if the risk-weighted assets were 100% of Rs 100 for personal loan receivables, the new rule makes it 125% of Rs 100. This compels banks to set aside more capital reserves, resulting in increased capital requirements. Well-capitalized banks may absorb the impact, but others might pass on the cost to borrowers. Non-Banking Financial Companies (NBFCs), which usually borrow from banks, could face a slowdown in lending due to heightened capital buffer requirements.

The impact is expected to make small-ticket personal loans, especially those from NBFCs, more expensive. This could translate into higher interest rates or stricter eligibility criteria, particularly for loans below Rs 50,000. Estimates suggest a potential 0.20% to 1.5% increase in interest rates, depending on the loan component and the lender.