RBI raises alarm over rising personal loan rates

New Delhi: The Reserve Bank of India (RBI) has expressed concerns over the rapid growth of personal loans. The central bank has advised lenders, and institutions that provide loans, to exercise caution in extending personal loans and to increase the risk weights associated with these loans. Private sector giants like HDFC, ICICI, Kotak Mahindra, and Axis Bank have raised their interest rates on personal loans. As up to half a percentage point over the past few months.

Personal loans that are granted without any collateral are categorized as unsecured loans. Expenses such as credit card debt, and loans for items like TVs and refrigerators fall under this category. Secured loans, on the other hand, involve lower risks and are therefore comparatively cheaper than personal loans.

RBI’s May 2024 report says..

The total outstanding personal loans have surged to ₹54.56 lakh crore, marking an increase of 28.7% from the previous year. This includes ₹2.68 lakh crore in credit card debt, which has grown by 26% since May 2023.

RBI is concerned that declining asset quality could increase non-performing assets (NPAs) in the banking sector. Primarily due to unchecked growth in personal loans. RBI has directed banks since November 2023 to maintain higher provisions. As risk weights for unsecured personal loans, credit cards, and non-banking financial companies (NBFCs). This measure aims to curb the unchecked rise in debt within this category.

Adhering to RBI’s guidelines, banks have increased provisioning for personal loans. Which is 100% to 125% as a precautionary measure against potential declines in asset quality. Regulators are implementing stringent measures in loan regulations to mitigate the risks associated with escalating debt burdens on banks.

Leading private banks like HDFC have increased their minimum annual interest rates on personal loans. Which is 10.75%, up from 10.35% in March. Kotak Mahindra Bank began offering personal loans at 10.99% after announcing an increase from 10.50% during the risk weight announcement. ICICI Bank is currently offering personal loans at an interest rate of 10.80%.

Following RBI’s risk weight announcement-

Axis Bank adjusted its interest rates from 10.49% to 10.99% for personal loans.

Former banker K.B. Singh points out that higher risk weights have affected bank profitability. Prompting increased interest rates on personal loans. These measures are expected to limit personal loan growth to essential needs, it constrain the sector’s expansion.

RBI emphasizes the necessity for individuals to take personal loans. It should be only for essential purposes. It also urges banks to exercise caution in lending practices. Ensuring the repayment of loans becomes crucial as banks prepare for financially challenging days ahead. Potentially making personal loans more expensive.

This regulatory approach underscores RBI’s proactive stance. As in managing the risks associated with personal loans. while safeguarding the stability of the financial sector.