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RBI's new unsecured lending norms FAQ: How much will loan rates rise, impact on credit card firms and more
What is meant by 'risk weight' and what has RBI exactly done?
'Risk weight' is the percentage factor that adjusts for the credit risk of different types of assets.
Increasing the risk weight refers to a hike in the percentage of capital that banks and NBFCs need to set aside to cover potential losses on loans.
For instance, if a loan previously required a risk weight of 100%, it demands 125% under the new regulations.
The increased risk weightage will result in higher capital requirements for banks and NBFCs.
This means they'll need to set aside more capital for lending in the unsecured category, affecting their capital adequacy ratio.
Why has RBI taken the step to increase the risk weight on assets for unsecured lending, encompassing personal loans and credit card loans?
The RBI’s circular is in sync with worries it had expressed on the high growth in unsecured lending during the previous monetary policy review.
The worry must be based on some data which shows early signs of delinquency.
As per the central bank, concerns arose due to an unusually high surge in these types of loans, particularly personal loans and credit cards, surpassing the overall bank credit growth of around 15% in the past year.
Virat Diwanji, Group President and Head of Consumer Banking at Kotak Mahindra Bank, said that the sub-segment within the unsecured lending which can lead to higher delinquencies are “consumption” loans, unsecured lending to “New to Credit” (first-time borrowers) and loans below ₹50,000 or any combination of these segments.
What is the possible impact of RBI's new norms on lenders?
This move will drive more caution for financial institutions (banks/NBFCs/fintechs) while deciding on unsecured lending.
The change in risk weightage will result in higher capital requirements for banks.
For banks to maintain risk-adjusted returns the lending rates need to go up, Diwanji of Kotak Mahindra Bank said.
He added that this will slow down the growth of unsecured lending over the next 3-6 months and push lenders to go selective on credit in the unsecured space.
Will borrowers be hit with RBI's new norms? Will lending rates see a rise?
Yes, the lending rates may rise.
At this stage, Diwanji of Kotak Mahindra Bank said it is safe to assume that the lending rates can go up anywhere between 40 bps and 75 bps but the actual scenario will be market-driven.
This move certainly has an impact on the ROEs of lenders.
Brokerage firm Morgan Stanley also suggested that the move could push up borrowing and lending rates within the financial landscape.
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How will online lending apps and NBFCs be affected by RBI's move?
As per Gurjot Singh, Co-founder of Collekto, the majority of the online lending apps procure capital from other NBFCs or banks.
NBFCs whose capital mix is skewed towards bank borrowings will suffer a dual impact.
One – they will have to set aside additional capital for lending in the unsecured category and secondly, the banks who are lending to them also have to set aside additional capital, thus leading to a higher cost of capital.
Since a majority of online lending apps cater to consumer loans, Singh said that the overall demand for such loans might go down as they are non-essential in nature.
For the existing loans, the ROI (Rate of interest) will increase and will affect the creditworthiness of the borrowers who are at the higher end of debt-to-income ratio.
What is the expected impact of RBI's norms on delinquencies and the stability of the Indian economy?
Delinquency numbers for unsecured loans below ₹50,000 was already at 5.4%.
The significant rise in delinquencies in the unsecured retail segment has led the regulator to take measures to create a stable environment for the Indian economy as compared to its counterparts.
As per Singh of Collekto, the delinquency rate would go higher as the number of borrowers who default increases and at the same time, the fresh lending rate goes down.
The delinquency rate refers to the percentage of loans that are past due.
It indicates the quality of a lending company's or a bank's loan portfolio.
How will RBI's stringent norms affect credit card companies and who will be most hit?
Analysts believe that SBI Cards will be hit the most due to the highest unsecured credit composition, followed by RBL Bank and Bajaj Finance.
For SBI Cards, 100% of their portfolio will witness an increase in risk weight.
It's already witnessing declining margins and lower revolver rates with high credit costs hurting them.
This move of RBI will only burden them more, experts believe.
