RBI Tightens Norms For Personal Loans, Credit Cards Amid Demand Surge

On 16th November, the Reserve Bank of India (RBI) implemented stricter regulations on personal loans and credit cards, increasing the risk of a slowdown in loan growth. These new rules, involving higher capital requirements, are expected to raise the cost of such loans, potentially restricting the growth in these sectors that has surpassed the overall bank credit growth of approximately 15% in the past year.

The RBI has raised the risk weights for both banks and non-bank financial companies (NBFCs) by 25 percentage points to 125% on retail loans. This adjustment applies to personal loans for banks and retail loans for NBFCs, excluding housing, education, vehicle loans, and loans secured by gold and gold jewellery.

Moreover, the RBI has increased risk weights on credit card exposures by 25 percentage points to 150% for banks and 125% for NBFCs. This higher capital requirement may lead to more expensive loans if lenders decide to pass on the additional cost, potentially reducing loan growth. Dhananjay Sinha, co-head of equities at Systematix Research, noted that either way, loan growth is likely to slow down.

In the face of concerns about rapidly growing personal loan categories, particularly small personal loans, RBI Governor Shaktikanta Das had previously mentioned monitoring such developments for signs of stress. Unsecured personal loans increased by 23% and outstanding amounts on credit cards rose nearly 30% compared to the previous year, as of September 22, 2023, according to central bank data.

Delinquency data from credit bureau Transunion CIBIL indicated that overall delinquencies for all personal loans were at 0.84%. However, loans below 50,000 rupees ($600.66) had higher delinquencies at 5.4%.

Sinha highlighted that the RBI’s decision to tighten rules indicates a perceived buildup of risk, prompting the central bank to instruct banks to establish counter-cyclical buffers. Additionally, the RBI has mandated banks to allocate additional capital for loans to NBFCs, where the current risk weight is below 100%, and to formulate board-approved policies for exposure to various consumer credit categories, including setting limits for unsecured consumer credit exposures.