The sharp growth in personal loans is losing momentum as banks have started going slow on unsecured loans following the Reserve Bank of India’s (RBI) hike in risk weight on personal loans last year.
The year-on-year growth of unsecured personal loans of banks have moderated to 23.1% in February from 24.4% in January and 27.6% in December 2023, showed Reserve Bank of India (RBI) data.
Within the personal loans, the growth in consumer durable loans has also eased to 14.6% in February from 20% in December while credit card outstanding has declined to 31% in February from 40% in December.
“The RBI has expressed its discomfort over high growth in personal loans. Slowing growth in personal loans shows that the banks have taken the RBI message seriously,” senior official of a private bank told FE.
The growth in other personal loans has eased to 22% in February from 26% in December, as per the RBI’s sectoral deployment of bank credit data.
Under personal loans, banks sell unsecured loans such as credit cards, consumer loans, microfinance and other small ticket loans not backed by any collateral.
Worried about the sharp rise in personal loans, the RBI had decided to increase risk weights on unsecured loans in November last year when it directed banks and non-banking financial companies to reserve more capital for risk weights.
The mandatory risk weight requirement was increased by 25 percentage points and is applicable to unsecured personal loans, credit cards and lending to NBFCs.
The move was aimed at slowing the pace of unsecured loans by increasing cost of funds for lenders. RBI governor Shaktikanta Das has also expressed concerns about unbridled growth in personal loans and advised lenders to go slow on unsecured loans.
“Apart from the impact of RBI’s risk weights, the growth in personal loans has also moderated because of lack of festival led demand in January and February. The demand for personal loan was high in November and December due to festivals,” said a senior official of public sector bank.
He added that fourth quarter is usually busy period for banks as credit demand remains high in January-March period.
Unsecured personal loans grew to `16.53 trillion in February this year from Rs 16.09 trillion in December last year. The trend of moderating growth of personal loan is expected to continue in the current financial year.
Several credit rating agencies expect credit growth to moderate in 2024-25 as banks will go slow in personal loans.
India Ratings and Research expects credit growth to decline by 100 basis points (bps) to 15% in the current financial year.