LENDING SOBRIETY

The Reserve Bank of India (RBI) has deemed it fit to tighten the screws on a certain sense of festival abandon that had gripped retail loans.

- M.G. Arun

Recognising the dangers that an unbridled rise in unsecured loans can cause to the banking system, the central bank has come up with norms that will ultimately make it costlier for banks to offer such loans. Unsecured loans are given out by banks without insisting on an underlying collateral or security, relying only on their judgement of a borrower’s creditworthiness. In its latest move, the RBI has increased the ‘risk weights’ on consumer loans for banks, non-banking finance companies (NBFCs) and credit card providers, making it more expensive for lenders across the spectrum to offer loans in these segments. Risk weights refer to the capital that banks keep aside as provisioning to cover any loan defaults.