RBI ups consumer loans' risk weights

After several months spent trying to sensitize lenders against the ongoing credit binge, the Reserve Bank of India (RBI) on Thursday raised risk weights on consumption loans, credit card exposures and loans to non-bank financiers by 25 percentage points each, hoping higher consumption of capital will slow such rapid growth.

- Shayan Ghosh & Gopika Gopakumar

Bankers and financial sector experts said this would mean borrowers of such loans would have to shell out more as lenders try to compensate for the increase in capital requirement.

Personal loans at India’s largest private lender HDFC Bank are currently available at interest rates ranging from 10.5% to 25% for salaried employees, showed data on its website.

“The cost of borrowing and cost of lending will go up a little. Banks will either try to shift from unsecured towards more secured loans or reduce the volume of unsecured loans," a senior private sector banker said on the condition of anonymity.

Macquarie said in a report on Thursday that HDFC Bank and SBI Cards & Payment Services are among the most impacted in terms of contraction in common equity tier one (CET 1) ratios.

The high growth in consumer credit and increasing reliance of non-banking financial companies (NBFCs) on bank loans, RBI said in a statement, were also highlighted by governor Shaktikanta Das in interactions with heads of major banks and large NBFCs in July and August 2023, respectively.

The growth in some unsecured loans—loans not backed by collateral—has outstripped total credit growth by a wide margin. For instance, credit card outstanding increased 30% year-on-year (y-o-y) in September, other personal loans grew 25% and consumer durable loans rose 11%. Overall bank credit growth was 20% in the same period, showed RBI data.