The reduction will happen selectively based on your risk profile
In a bid to boost consumption demand hit by the NBFC crisis, the RBI reduced risk-weights for consumer loans, in its monetary policy on Wednesday. Consumer loans include consumer durable loans, auto loans, credit card and personal loans. From 125 per cent, the RBI has brought down the risk weight to 100 per cent for consumer loans (excluding credit cards).
While this could nudge banks to offer cheaper consumer loans, it may only happen selectively depending on the risk profile of the borrower. So don’t rush to take on additional loans, and remember not to fall prey to alluring deals.
RBI regulations require that the amount of capital a bank holds is pegged to the profile of its borrowers; riskier the borrowers, higher the capital needed. The central bank assigns different ‘risk weights’ to different types of loans based on the possible defaults for each category. Reducing the risk weight from 125 per cent to 100 per cent will essentially free up capital, nudging banks to push consumer loans in the coming months.
But given that banks have been chasing risky unsecured retail loans including personal loans, over the past three years, RBI’s latest measure needs a watch.
What banks offer
Interest rates on personal loans and vehicle loans are fixed in nature and banks charge rates based on the risk profile of the borrower. For instance, banks charge anywhere between 13-22 per cent on personal loans, and 9-13 per cent for a new car loan.
While the RBI’s move may give some leeway to banks to lower rates on these loans, the reduction will happen selectively based on your risk profile. Banks are likely to charge higher interest rate for borrowers with a poor credit score and large existing loans. Hence don’t rush to take on additional loans and keep your credit within manageable limits.
In any case, banks have been aggressively pushing such products over the past three years. Increasing stress and defaults can lead them to price such loans higher, for certain borrowers. So be sure to read the fine print before taking on an additional personal loan. Also remember that the RBI’s easier norms do not cover credit cards—so the steep interest rate on your credit card may be here to stay.
Between FY15 and FY19, even as credit growth to industry fell to single-digit (slipping into negative in FY17), retail loans have sported double-digit growth of 16-19 per cent. Share of retail loans in overall bank credit (non-food credit), has gone up from 19 per cent in FY15 to 25.7 per cent in FY19 and inched up further to 26.6 per cent as of June 2019. The growth in retail has mainly been led by risky unsecured segments such as credit cards and personal loans, which have grown by about 30 per cent CAGR (compounded annual growth) over the last three years. As of June, credit card and personal loans grew by 27 per cent and 23 per cent respectively.
Within retail, home loans continue to constitute about half the portfolio. However share of credit cards and other personal loans has gone up significantly due to the steep growth over the past three years. Credit cards and other personal loans that were less than a fourth of the retail loan portfolio until FY15, now constitute about 32 per cent (as of June 2019).
Given that unsecured retail loans enjoy higher yields, banks have been chasing these loans to improve margins.
Rise in NPAs
But unsecured loans such as personal loans are risky by design and hence need a watch. While at the system level, bad loan ratio in retail loans has remained within 1.8-2 per cent according to RBIs financial stability report, at the individual bank level some stress has been visible in recent times.
For instance, for ICICI Bank’s gross retail NPAs stood at ₹3667 crore as of March 2017 or 1.5 per cent of retail loans. Retail NPAs have inched up to ₹6973 crore in the latest June quarter, forming 1.9 per cent of the bank’s retail loans. Not an alarming trend yet, but the stress in the book appears to have gone up.
For IndusInd Bank, NPAs in credit cards that stood at 1.3 per cent in March 2017 has inched up to 2.2 per cent as of June 2019 quarter.
Recently Moody’s had cautioned that economic growth in India over the next 12-18 months would remain weaker than the previous years, which, in turn could lead to the creation of new non-performing loans in the retail and small- and medium-enterprise segment. This could, in turn, lead to banks charging higher interest rate on such loans, for certain category of riskier borrowers.