The Reserve Bank of India (RBI), in a circular dated November 16, 2023, increased the risk weights on consumer credit exposure (both existing and new) of commercial banks and non-banking financial companies (NBFCs) from 100 per cent to 125 per cent.
For credit card receivables, the risk weights for scheduled commercial banks were raised from 125 per cent to 150 per cent and for NBFCs from 100 per cent to 125 per cent.
Risk weights on bank credit to NBFCs were also increased. The regulator also mandated that banks and NBFCs place limits on consumer credit and its various sub-segments.
Loans may become costlier
The RBI’s measures will require lenders to set aside higher capital for unsecured lending.
“This may impact the pricing of unsecured loans,” says Naveen Kukreja, co-founder and chief executive officer (CEO) of PaisaBazaar.
According to Raoul Kapoor, co-CEO of Andromeda Sales and Distribution, “This recent change is poised to increase the cost of personal loans, credit cards, and consumer durables financing (electronics, gadgets, etc). Housing, education, vehicle, and gold loans will remain unaffected.”
The availability of these loans may shrink.
“These measures may reduce the supply of unsecured loans from NBFCs and credit cards,” says Kukreja.
Kapoor adds that lending norms for these segments may become stricter.
Customers, too, need to be more prudent while borrowing in this new environment.
“Borrow only what you can comfortably repay each month. Also, credit card spending should not exceed 25-30 per cent of the overall limit,” says Adhil Shetty, CEO of BankBazaar.
In an environment where lenders may follow tighter norms, do your research before applying for a loan. Find out which lenders are likely to lend to you given your credit profile.
Indiscriminate applications could lead to multiple rejections, harming your credit score. Too many applications will also make you appear credit-hungry, making other lenders wary of lending to you.
Lenders consider the credit profiles of their loan applicants to decide whether to lend to them and to fix the interest rate. As credit assessment processes vary across lenders, the chances of loan approval and the pricing of the loan also vary.
“Individuals planning to avail of personal loans should compare the interest rates of as many lenders as possible before making the final loan application,” says Kukreja.
First, contact those lenders with whom you already maintain deposits or have availed of loans or credit cards.
“Many lenders offer preferential interest rates to their existing customers. Next, visit online financial marketplaces to compare the interest rates offered by other lenders,” says Kukreja.
The final choice, according to him, should be in favour of the lender offering the best overall deal on interest rates, processing fees, loan tenure, and time taken to disburse the loan.
Improve credit profile
Borrowers with a stable income, a credit score of 750 or above, and a track record of timely payments will still find it easy to get loans. Those who do not have such a profile should work on improving it by ensuring timely payment of credit card outstanding and equated monthly instalments (EMIs).
Automate these payments. If you find it difficult to get a personal loan or a credit card, offer some collateral.
“Try to obtain a secured personal loan or credit card by offering some collateral, such as a fixed deposit or gold. Not only will this improve your eligibility, but the lender may even offer a lower interest rate,” says Shetty.
As your credit score improves, ask for a hike in the credit limit on your card.
“This will come in handy whenever you need funds immediately. Instead of going for a personal loan, use your credit card and convert the outstanding into EMIs,” says Shetty.
Consider the interest rate before taking this route.