Access to personal loans and credit cards might become costlier for those with a credit score below 750 or those who have defaulted or are late on their payments, say experts. This is because 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), which means that financial institutions have to set aside more capital for such loans now.
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“India is a market where less than 5% of people has a credit card? There are 1 billion credit cards in the U.S. India is a very young emerging country, so growth will be there. But could that growth in unsecured personal loans be slightly tempered? It could be. Broadly, it comes down to the type of consumer you are because if you’re a good credit score consumer, if you’re going to pay back your loan, there is always profit in it for the lender. The problem starts when we go to consumers who, for various reasons, might not be able to pay back the loan. Now that’s a problem for everyone. It’s a problem for the consumer. It’s a problem for the regulator. It’s a problem for the lenders. So, if your credit score is 750 above, if you keep your credit score high, I genuinely believe there’s nothing you need to worry about. You will get access to personal loans. You will get access to a credit card. However, if you don’t have a credit score and if you are late on your payments if you defaulted on a loan, I think the additional costs might now come in, and the lender might think more before lending to you,” said Adhil Shetty, CEO of Bankbazaar, a marketplace for loans and credit cards.
The new guidelines will not impact existing borrowers as they have already signed contracts with lenders at fixed rates. However, certain types of consumers for certain products might end up paying anything between 0.2% and 0.4% more, added Shetty.
There has been a steep jump in credit cards over the years. The total number of credit cards in existence has jumped nearly 4 times in the past nine years from 19.6 million in 2014 to more than 90 million now. The outstanding credit card balance also increased by 30% year on year (y-o-y) in September 2023; other personal loans increased by 25%, and consumer durable loans increased by 11%, according to RBI data. During the same time period, overall bank credit increased by 20%. The significant rise in delinquencies in the unsecured retail segment has also led the regulator to take measures to increase banks’ sensitivity and encourage them to do prudent unsecured lending.
“When risk weightage increases, banks are required to set aside more capital as a buffer against potential losses. This higher cost of capital can make unsecured lending, such as credit cards and personal loans, more expensive for financial institutions. To maintain profitability, banks may respond by increasing interest rates or becoming more selective in their lending practices. Also, higher interest rates and tighter lending standards may result in reduced access to credit for certain borrowers, and individuals who were previously eligible for unsecured loans may find it more challenging to obtain credit, limiting their ability to borrow for various purposes. Moreover, in response to the increased risk weightage on unsecured loans, both borrowers and lenders may shift towards secured lending options.
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Secured loans, backed by collateral, are perceived as less risky, and borrowers may find it easier to qualify for such loans. This shift could lead to a relative decline in the demand for unsecured credit,” says Mahesh Shukla, Founder & CEO of PayMe, a fintech firm that offers short-term and personal loans. The fintech has seen a 145% jump in retail loans to Rs 450 crore in FY23. Its gross NPA is currently at 3.2%.
The latest report from TransUnion CIBIL’s Credit Market Indicator (CMI) states that vintage delinquency trends revealed an uptick in Q4 2022 on consumption loan products compared to Q4 2019. Notably, personal loans of less than Rs 50,000 saw an increase to 10% from 7.56% in Q4 2019. The delinquencies for personal loans above Rs 50,000 and credit cards also increased to 3.20% and 4.40% (Q4 2022), from 2.08% and 2.88% in Q4 2019. Vintage delinquency is calculated as a percentage of the sanction amount on accounts ever 30+ days past due in six months from origination.
It was also observed that around 51% of consumers who availed small-ticket personal loans in Q2 2023 already had more than four credit products at the time of availing another new loan, a sharp contrast to just 17% in the same category in Q2 2019. Besides, the increase in interest rates might lead to borrowers reducing their risk appetite and opting for a small-ticket size loan.
“While the exact increase in personal loan rates cannot be determined immediately, it will depend on how much of the increase in the cost of funds will be absorbed by the lending institutions and how much is passed on. For instance, the institutions who might want to focus on strengthening their loan book might absorb the majority of the cost and not pass it on to the end borrower. This will be to maintain the high growth rate, thereby compromising on their margins,” said Gurjot Singh, Co-founder, Collekto, a fintech company specializing in retail debt collections.
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On the contrary, a conservative institution that is willing to compromise on its growth target (in the short term) while maintaining healthy margins might pass on this burden to its borrowers. At the same time, they would also want to keep a check on the increase in the delinquency rate, specifically for borrowers with a high Debt-to-income ratio, added Singh.
