As the Reserve Bank of India (RBI) has increased the risk weight on unsecured lending, including credit card receivables by banks and non-banking finance companies (NBFCs), interest rates on unsecured personal loans will go up. For those with a credit score below 750, the hike will be steeper. Borrowers will have to pay higher equated monthly installments, and even those eligible to obtain credit cards or personal loans may face stricter terms and conditions.
At present, the interest rate on personal loans is 10.5% to 17% and that of credit cards between 36% to 45%.
Lenders may reduce the supply of unsecured loans, especially those with a higher perceived risk, as they will need to allocate more capital to cover these loans. Experts say banks, especially those that are not heavy on unsecured advances, will continue to do business with eligible borrowers while recalibrating their priorities to higher risk weights. Banks that have a relatively higher percentage of unsecured advances on their books may take a cautious approach now.
Squeeze on low-cost funds
Lenders will calibrate their priorities based on how the weight adjustment impacts them. Adhil Shetty, CEO, Bankbazaar.com, says banks with relatively higher exposure to unsecured loans will react more sharply than banks that don’t. “The impact of higher costs on unsecured loan products will be passed on to the borrowers. But this is also a very competitive market in which lenders will try to acquire low-cost funds through any channel available to them including via retail investors through deposits, bonds, and mutual funds,” says Shetty.
The hike in risk weight can make it challenging for individuals to obtain a personal loan and even those eligible will face stricter terms. “Online lending apps, operating in a competitive environment, may respond by increasing interest rates to maintain profitability. Borrowers should stay informed about any changes and regularly review their financial situation for informed decisions,” says Mahesh Shukla, CEO & founder, PayMe, an online personal loan platform.
The central bank’s measures might also reduce the supply of unsecured loans by NBFCs and credit cards depending on how banks reassess their respective strategies. Naveen Kukreja, co-founder and CEO, Paisabazaar, says, “From the data that we have so far, we have not seen any increase in delinquency rates in the prime or super-prime segments of unsecured personal loans. However, it may have been seen in smaller ticket loans, especially of loan amounts of under Rs 50,000.”
Build high credit score
As unsecured loans are more expensive than secured loans, borrowers should carefully consider whether an unsecured loan is the best option for their needs. They should use online lending apps to know about any changes in interest rates, or loan terms and conditions. “Borrowers with scores of 750 or higher will get the best credit card and loan offers. If they have a lower score, they must improve it,” says Shetty.