We work on salaried jobs and earn to improve our lifestyle and make it more comfortable with every possible convenience out there. And taking personal loans to live that life has become more of a norm. And that too, such a major norm that it has grown at an unexpected rate in the past few years. As they were becoming a potential threat to the financial system, escalating many risks in the market, the Reserve Bank of India (RBI) decided to pull the chains on these unsecured retail loans by increasing the risk weights on the same as mentioned in a circular released on 16th of November 2023. It was noticed that personal loans below ₹10,000 have been flying off the shelf. The new move will directly hamper the interest rates of banks, non-banking financial companies (NBFC), and credit card providers, making it expensive for lenders. The circular further directed banks to withhold more capital and set up a board-monitored process on these consumer loans which will eventually help in preventing risk escalation in the financial system. With the aim to make lenders more cautious on such advances, India's banking regulator has raised the risk weight by 25 percentage points. As a result of this move, the share market witnessed as much as a 7% fall in various banks’ shares the very next day, i.e. 17th of November 2023. The share market experts suggested that a high selling pressure is the reason behind such a significant fall. How Personal Loans Are Risk Escalators: Ashutosh Bhardwaj, SEBI-Registered Research Analyst Even such a small amount of loan being approved should not be a cause for concern, right? Our SEBI-registered research analyst, Ashutosh Bhardwaj also brings to the public notice that people are missing the due date to pay back the same amount, which further escalates the problem. Where the entire nation witnessed 12-14% of credit growth, the personal loan sector reached as much as 23%, which is way more than usual. According to a report by credit bureau Transunion Cibil, when it comes to one small-ticket personal loan, the borrowers who missed the repayment date (balance-level delinquency rate) was around 5.4% in the second quarter of the financial year 2023-2024, which is up 120 bps (basis points) since the second quarter of FY2022-23. Although the overall balance-level serious delinquencies (90 days or more past due date) have improved across product categories since Q2 FY2022-23, but the credit cards and personal loans represent a totally different picture when it comes to it. How Did the Money Market Take the Blow? The share market went into a frenzy with pressured selling and constantly falling shares of various commercial banks across the length and breadth of India. The following banks witnessed a certain fall Axis Bank – 3% Bank of Baroda – 2.31% Canara Bank – 2.67% Federal Bank – 1.39% HDFC Bank – 1.26% ICICI Bank – 1.16% IndusInd Bank – 0.89% State Bank of India – 3.34 % As a result of all the declines, even the BSE Bankex index fell as low as 1.12%. Coming to the non-banking financial companies (NBFCs), their shares also tumbled something like this: Arman Financial Services – 3.91% IIFL Finance – 3.78% SBI Cards and Payment Services – 6.70% Ujjivan Financial Services – 5% Which Sectors This New Regulation is Not Covering? As personal loans include a small ticket amount, it is the only one under the radar at this moment. The official circular released by the current RBI Governor, Shaktikanta Das clearly mentions that the new regulations will not apply on education loans, housing loans, vehicle loans, and a few more. As per the official circular “It has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125 %". What Do the SEBI-Certified Research Analysts Have to Say About This? As higher risk weight results in expensive credits, lending institutions like banks, NBFCs, and credit card providers need to reserve a certain amount of funds as a safety net for consumer loans. If told directly, this higher risk weight consequently restricts the lending capacity of these financial institutions. Even SEBI-certified research analysts at Logical Nivesh have to agree with the aforementioned market analogy about risk weight. With a cap on banks and NBFCs’ lending capacity and the common man’s day-by-day increasing standard of living, how the new regulations will play out, is yet to be seen.
