The Reserve Bank of India’s (RBI) decision to increase risk weights is expected to reduce the enthusiasm amid banks and non-banking financial companies (NBFCs) to extend unsecured loans, said bankers and industry players.
State Bank of India chairman Dinesh Khara said the growth in unsecured loans will depend upon the cost of credit because there is a risk premium over the base cost. “What is being attempted is to slow indiscriminate lending. There won’t be any impact on consumption,” Khara said on a leading television channel.
Virat Diwanji, group president and head of consumer banking, Kotak Mahindra Bank, added that if the cost of loans goes up, there could be some impact on growth of unsecured loans. “Most lenders would likely reprice their loans following the rise in the risk weight in order to protect their returns,” he added.
Industry experts expect the growth in unsecured loans to moderate to around 25% from over 30% witnessed in the past.
“The growth in unsecured loans will be there, but it will not be the kind of growth we have seen in the past few years. From over 30% growth seen earlier, we may see the incremental growth moderating to mid-20s,” Soumyajit Niyogi, director – core analytical group, India Ratings & Research told FE.
However, he added that the central bank’s decision will unlikely to have any significant impact on the overall credit growth in the banking system.
Banks have seen a sharp rise in unsecured loans, mostly personal loans and credit cards. In the second quarter of this year, banks have reported 25%-60% growth in personal loans. Lenders sell unsecured loans such as credit cards, consumer loans, microfinance and some other small ticket loans not backed by any collateral under personal loans.
As per the Reserve Bank of India data, banks’ personal loan book is Rs 48 trillion, of which share of unsecured loans like consumer durables, credit cards and other such categories, on which higher risk weight is applicable is nearly 30% or Rs 14.8 trillion.
Experts expect some banks and NBFCs to hike interest rate on unsecured loans to protect their profit margins which in turn lower the demand for such loans.
“There will certainly be a moderation in the growth of unsecured loans after RBI’s decision. The days of extraordinarily high growth in unsecured loans are over for banks and NBFCs,” said Sanjay Agarwal, Senior Director, Care Ratings.
He added that demand may also be impact if banks and NBFCs decide to raise interest on unsecured loans because the salaried class, which gets loans at around 10% range, is sensitive to any change in interest rates.
However, the demand for unsecured loans from customers who take personal loans at 12% or more, will not be affected as they are insensitive to moderate hike in interest rates.