RBI may up risk weights on unsecured personal loans

The Reserve Bank of India (RBI) may raise the risk weights on unsecured personal loans and payable on credit cards to curb the strong growth in these sectors and reduce potential bad loans.

Bankers say that while things are going well at the moment with personal loans and unsecured credit cards due to strong demand, the fear is that during times of trouble, distressed assets will emerge, which can hit banks. So, they expect some “action” on risk weights from the central bank.

Higher risk weights will modify banks’ ability to lend to the personal loan and unsecured credit card segments as capital charges will rise. Presently, the risk weight on unsecured and credit card outstanding personal loans is 100 percent and 125 percent respectively. Risk weights are percentage factors that adjust for the credit risk of different types of assets.

Loan provision

According to data from the Reserve Bank of India, unsecured personal loans grew by 24 percent YoY on April 21, 2023, compared to a growth of 18.2 percent YoY on April 22, 2022. Credit Card Payable also grew by 29.7 percent YoY on April 22, 2022. Annual as on April 21, 2023, compared to a growth of 20.1 percent year-on-year on April 22, 2022.

“If an unsecured personal loan defaults, the loss is immediately 100 percent. In the first year of an unserviced loan, the bank may offer 25 percent, but in the second year, it must be advanced in full. In some banks, in the first year Same, 100 percent provision is made for unsecured loans,” said a senior bank official in the private sector.

The official noted that when the risk weight is increased, capital is consumed. Therefore, higher capital must be allocated for making these loans. Therefore, to this extent, the ability to lend is further adjusted.

credit growth

Care Ratings, in a recent report, said that Unsecured Loans (Other Personal Loans + Credit Card Due + Consumer Durables) recorded robust growth of 25 percent year-on-year in April 2023 due to credit segmentation, loan digitization, preferences for premium consumer products, and credit payment from before banks.

The share of unsecured loans increased to 32.9 percent in the personal loan sector on April 21, 2023, compared to 31.4 percent over the previous year. After housing, unsecured loans are the second largest component of the personal loan sector. Given the strong demand in the various retail loan segments, the agency expects retail credit growth to remain strong in FY24.