Lending rates may go up after RBI tightens norms for personal loans

Tribune News Service

New Delhi, November 17

Lending rates may go up after the RBI on Thursday tightened norms for consumer credit by raising risk weight for unsecured personal loans, S&P Global Ratings said on Friday.

Credit growth to take hit

• The RBI on Thursday increased risk weights on unsecured personal loans, credit cards, and lending to NBFCs by 25 percentage points
• The move will curtail riskier bank lending to consumers and is expected to squeeze the non-bank sector in particular
• This will likely lead to higher lending rates, lower credit growth, and increase the need for capital raising among weak lenders

The move, which will raise banks’ capital adequacy by 60 basis points, is aimed at curbing riskier lending, especially by the non- bank sector. The RBI on Thursday increased risk weights on unsecured personal loans, credit cards, and lending to non-banking financial companies (NBFCs) by 25 percentage points.

Though lending rates may rise, the new norms may counter inflation by lowering credit growth, it said, adding that higher risk weights will ultimately support asset quality.

“Slower loan growth and an increased emphasis on risk management will likely support asset quality in the Indian banking system. However, the immediate effect will likely be higher interest rates for borrowers, slower loan growth for lenders, reduced capital adequacy, and some hit on profits. We estimate the Tier-1 capital adequacy of banks will decline by about 60 basis points. Financial companies will be worse affected as their incremental bank borrowing costs will surge, in addition to the capital adequacy impact,” said the global ratings agency.

The RBI has been frequently commenting on the rapid rise in unsecured personal loans and credit card debt. It has especially flagged unsecured loans for consumer lending and small personal loans of less than Rs 50,000. At present, the delinquency rate of 90-plus days past due is at acceptable limits, it added.

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