RBI's new loan norms aimed at protecting unsuspecting consumers

Vibha Sharma

Chandigarh, November 18

The Reserve Bank of India on Thursday tightened norms for consumer credit/personal loans. It asked banks and NBFCs to assign a higher risk weight for unsecured personal loans, a move aimed at making lenders more cautious and at the same time also protect consumers.

The decision hit non-banking financial companies (NBFCs) and certain banks on Friday with their shares tanking.

Easy loans/credit

There may not be many who can claim to have not received unsolicited calls and messages offering easy personal loans requiring “minimum documentation”.

Experts say that in today’s world, providing loans is a good business, especially with youngsters focused on consumerism—new cars, mobiles and what not—in the credit card culture. The lure is high and temptation hard to resist. There are additional tricks, reward points through credit card bills, ‘buy now pay later’ options, loans for holidays, etc. There have been instances where banks have offered to convert credit payment into loans and “easy-to-pay” instalments.

Due to the slowdown in corporate loans, banks, too, have been chasing retail customers for loans, they add.

“At times, the lure of top loan is presented before the existing loan gets over. Top-up loan is also a sort of an unsecured credit. The temptations are hard to resist as people mostly need money and many times the top-up is offered at the same rate. Through top-up also, banks and NBFCs push new loans to borrowers,” the experts explain.

What it means

Now with the RBI increasing risk weights on unsecured personal loans, credit cards, and lending to NBFCs by 25 percentage points, lending rates are expected to go up.

But while lending rates may rise, lowering credit growth may end up countering inflation, a major headache for the Narendra Modi government ahead of the 2024 Lok Sabha election.

However, the immediate effect is expected to be higher interest rates for borrowers, slower loan growth for lenders, reduced capital adequacy, and some hit on profits, according to reports.

The move is also aimed at curbing riskier lending, especially by the non-bank sector. In the longer run it means increased emphasis on risk management and support for asset quality, which will be good for the Indian banking system.

Quite naturally, the new norms are not applicable on housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery—loans that are supported by good assets.

Reasons behind  

According to reports, banks and NBFCs had been giving out too many unsecured personal loans which was also flagged by the central bank on several occasions. One particular concern has been consumer lending, small personal loans of less than Rs 50,000 and credit card debt.

By tightening capital norms, the RBI appears to have tried to curtail the aggressive loan push to consumers. Experts believe it will now be tougher for financial institutions to disburse loans as easily and freely as they used to.

“Easy personal loans are driving the credit culture, which proved to be a peril of many countries eventually. Some people are living beyond their means because of easy loans. High rate of delinquency and default has also been noticed in the unsecured loan segment,” they say.

A loan becomes delinquent when the borrower makes payments late or misses a regular instalment payment. A loan goes into default when the borrower fails to keep up with ongoing loan obligations or does not repay according to the terms in the agreement.