The Reserve Bank of India’s (RBI) recent decision to tighten lending norms for personal loans is likely to push up interest rates by 25-100 basis points, making them more expensive for borrowers. This move is aimed at curbing excessive risk-taking in the personal loan segment and ensuring financial stability.
The increase in your interest rate will depend on the number of basis points by which the RBI tightens lending norms. For example, if the RBI tightens lending norms by 25 basis points, your interest rate could increase to 10.25%. If the RBI tightens lending norms by 100 basis points, your interest rate could increase to 11.00%.
Impact on Borrowers
The higher interest rates will have a direct impact on the pockets of common people who rely on personal loans to meet various financial needs, such as education, medical expenses, or home renovation. A 25 basis point increase in interest rates, for instance, would translate into an additional monthly EMI of Rs. 50 for every Rs. 1 lakh borrowed. For a larger loan amount of Rs. 10 lakh, the EMI would increase by Rs. 500 per month.
Detailed Data and Numbers
To illustrate the impact of the RBI’s decision, consider the following example:
- Loan Amount: Rs. 5 lakh
- Current Interest Rate: 10%
- Current EMI: Rs. 10,417
- New Interest Rate: 10.25%
- New EMI: Rs. 10,611
As evident from this example, a 25 basis point increase in interest rates leads to an additional EMI burden of Rs. 194 per month.
Voices from the Finance Sector
RBI Governor Shaktikanta Das:
- Governor Das has indicated that the RBI was closely monitoring fast-growing personal loan categories for signs of stress, especially given the surge in small personal loans. This aligns with the RBI’s concerns about the increased risk in these lending categories
Dhananjay Sinha, Co-head of Equities, Systematix Research:
- Sinha notes that the higher capital requirement will make loans more expensive if lenders pass on the cost. Alternatively, if lenders absorb these costs, their margins will decrease, making lending less attractive and slowing loan growth
Implications for Common Public
The higher interest rates on personal loans could have several implications for common people:
- Reduced Borrowing Capacity: With higher interest rates, the disposable income of borrowers will decrease, potentially reducing their borrowing capacity. This could make it difficult for them to access credit for essential needs.
- Delayed Financial Goals: The increased cost of borrowing could delay individuals’ financial goals, such as purchasing a home or pursuing higher education.
- Higher Financial Stress: The additional burden of higher EMIs could increase financial stress among borrowers, particularly those with limited incomes.
Alternative Financing Options
In light of the rising interest rates on personal loans, borrowers should consider exploring alternative financing options, such as:
- Savings: Building a strong savings corpus can reduce the need for borrowing and help individuals meet their financial goals without incurring high-interest costs.
- Government Schemes: Various government schemes offer subsidized loans for specific purposes, such as education or housing. These schemes can provide a more affordable financing option compared to personal loans.
- Credit Counseling: If facing financial difficulties, individuals can seek credit counseling services to manage their debts effectively and improve their financial well-being.
The RBI’s decision reflects a cautious approach to managing the burgeoning personal loan sector amidst global economic uncertainties and domestic inflation concerns. The diverse opinions of these experts provide a comprehensive picture of the potential ramifications of this policy change on both the financial sector and consumers. The consensus seems to be that while the move could curb risky lending practices, it might also make personal loans more expensive and potentially slow down their growth.