The Reserve Bank of India (RBI) has increased the risk weightage on personal loans and credit card receivables by 25 percentage points for banks and non-banking financial companies (NBFCs). This regulatory adjustment, effective today, is set to potentially hike borrowing costs for individuals, particularly those with credit scores below 750 or with poor repayment histories.
The central bank's decision comes against the backdrop of a significant rise in the number of credit cards in India, which has quadrupled since 2014, surpassing 90 million. Additionally, there has been a steep increase in credit card balances year-on-year as of September 2023. Overall bank credit has expanded by one-fifth over this period. The RBI's move aims to address rising delinquencies observed in the sector.
Industry experts have weighed in on the potential impact of the RBI's action. Financial services company Bankbazaar highlighted that while existing contracts will not be affected, new borrowers could see interest rate increases ranging from 0.2% to 0.4%. PayMe suggested that banks may respond by raising interest rates or tightening lending standards due to the heightened capital requirements. PayMe itself has witnessed a surge in retail loans.
Moreover, data from TransUnion (NYSE:TRU) CIBIL indicates an uptick in vintage delinquency trends since Q4 2019, with small-ticket personal loan delinquencies showing a notable rise from those levels. Collekto noted that lenders now face a choice: they can either absorb the additional costs resulting from the increased risk weightage or pass them on to customers. The fintech company also mentioned that lenders might intensify monitoring of customers with high debt-to-income ratios following these regulatory changes.
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