The FinTech sector isn’t the only one feeling the impact of regulatory actions. Banks are now treading carefully in the realm of personal loans, thanks to the Reserve Bank of India’s (RBI) recent moves. Let’s delve into the details and understand how this cautious approach is affecting borrowers and lenders alike.
Moderated Growth in Personal Loans
According to RBI data, the year-on-year growth of unsecured personal loans has taken a step back. In February, it moderated to 23.1%, down from 24.4% in January and 27.6% in December 2023. This shift reflects banks’ response to the RBI’s concerns about the rapid expansion of personal loans.
But what prompted this change? Let’s explore:
The RBI’s Action Plan
In November of last year, the RBI decided to tighten the screws on unsecured loans. By increasing the risk weights associated with these loans, the central bank aimed to slow down lending and raise the cost of funds for lenders. Here’s what happened:
- Risk Weight Increase: The RBI mandated a 25 percentage point increase in risk weight requirements for unsecured personal loans, credit cards, and lending to non-banking financial companies (NBFCs). This move was a direct response to worries over unchecked growth in personal loans.
- Governor’s Caution: RBI Governor Shaktikanta Das also advised lenders to exercise caution and reduce reliance on unsecured loans. The message was clear: Balance risk and growth.
Festival-Led Demand and Beyond
Apart from regulatory actions, the moderation in personal loan growth can be attributed to the absence of festival-led demand in January and February. After a surge during the festive period in November and December, borrowers seemed less enthusiastic about taking on additional debt.
Numbers Speak
- Unsecured Personal Loans: Stood at Rs 16.53 trillion in February, slightly up from Rs 16.09 trillion in December. However, the trend suggests a continuation of moderated growth throughout the current financial year.
- Consumer Durable Loans: Within the personal loan segment, growth in consumer durable loans eased to 14.6% in February from 20% in December.
- Credit Card Outstanding: Credit card outstanding declined to 31% in February from 40% in December.
India’s Position on the Global Stage
India remains a significant player in the global FinTech arena. However, sustaining growth and innovation while navigating changing market dynamics is the challenge. As we move forward, banks and borrowers must find a delicate balance—one that ensures access to credit while mitigating risks.
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The RBI’s actions have set the tone for responsible lending, urging banks to recalibrate their strategies. Borrowers, too, should approach personal loans with prudence. As the financial landscape evolves, vigilance and adaptability will be key to maintaining a healthy credit ecosystem.
Disclaimer: The information provided in this article is based on publicly available data and research. Readers are advised to conduct their own due diligence before making any financial decisions.
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Source:
- Banks go slow on personal loans after RBI raises costs