By Linus Garg
First publised on 2023-11-17 07:11:05
Of late, there has been a huge surge in both credit card dues and personal (unsecured) loans, leading to the belief that consumers are borrowing more to spend. This has led the RBI to take note and warn banks as this could result in customers defaulting on the loans. For several weeks now, the RBI has been cautioning banks on this. But the banks have resorted to higher lending in this segment as corporate demand for credit is not growing.
Yesterday, the RBI stepped in to make lending to this segment costlier for banks by increasing the limit of capital they have to set aside for providing such credit. The risk weight on such loans has been increased from 100% to 125%. Hence, the capital banks have to set aside has increased by 25%. RBI also increased risk weight on credit card receivables and bank loans to NBFCs.
Increased consumer demand from unsecured, borrowed funds has multiple consequences. It has been reported that by the end of September 2023, credit card outstandings have surged 30% Y-o-Y and personal loans by 25%. For banks, it can lead to bad loans on the books and further stress. For consumers, it might lead them into a debt trap for they are borrowing against future income which might not materialize and might make them default on the loans.
The RBI has done well to take note of the developing situation and make it costlier for banks to cater to this segment. The increased capital requirement will perhaps force banks to be more conservative in allowing unbridled growth in this segment. Easy money policy can be good in times when salaries are increasing and the job market is good. But with salaries not increasing as per earlier years, many companies laying off staff and joblessness increasing, this is not the right time for giving out unsecured loans to people with average credit rating.