On November 16, 2023, the Reserve Bank of India (RBI) implemented stricter norms for consumer loans, a significant development in the Indian financial sector. This move, aimed at curbing the surging growth in unsecured lending, has broad implications for consumers, banks, NBFCs, and the economy.
- Increased Risk Weights: The RBI has raised the risk weight for consumer credit exposure for banks and NBFCs by 25 percentage points, now standing at 125% for retail loans. This increase means that banks and NBFCs will need to allocate more capital against these loans, making them costlier to offer.
- Credit Card Receivables: Specifically for credit card receivables, the risk weight has been increased to 150% for banks and 125% for NBFCs.
- Exclusions: These new requirements do not apply to what are considered safer loans, like housing, education, vehicle loans, and loans secured by gold and gold jewelry.
The RBI’s decision stems from a substantial increase in unsecured personal loans and credit card outstandings, which grew 23% and nearly 30%, respectively, from the previous year. This surge in unsecured lending raised concerns about potential financial instability and bad loans, prompting the RBI to take preemptive action.
Impacts on the Economy
- Consumer Spending and Loan Growth: These stricter norms are expected to slow down consumer spending, as borrowers find it more difficult and expensive to obtain credit. This could ripple through the economy, impacting businesses relying on consumer purchases.
- Startups and Fintechs: Many startups, particularly in the fintech sector, which rely heavily on NBFCs for consumer lending, are likely to feel the pinch. The increased cost of capital for these startups may lead to tighter credit standards and moderated growth.
- Banks and NBFCs: The higher risk weighting means that banks and NBFCs will need to set aside more capital for consumer loans, potentially affecting their profitability and lending capacity. This could lead to a general slowdown in loan growth.
- Inflation and Financial Stability: In the medium term, these measures could help moderate inflation and reduce financial instability risks. However, they also carry the risk of triggering a broader economic slowdown if credit becomes too constrained.
- Market Competition: The changes may also lead to increased competition among banks and NBFCs for alternate sources of funding, potentially driving up the overall cost of funds.
The RBI’s tightening of consumer loan norms is a strategic move to balance the need for financial stability with sustainable economic growth. While it aims to mitigate the risks associated with rapid unsecured lending growth, it also poses challenges in terms of reduced consumer spending and impacts on various sectors, especially fintech and startups. It’s a pivotal moment for the Indian financial sector, and the RBI will need to continuously monitor and adjust its policies in response to the evolving economic landscape.