Personal Loans, After issuing a previous warning, the Reserve Bank of India (RBI) has chosen to address the possible hazards related to the unrestrained rise of personal and unsecured loans. Governor Shaktikanta Das of the RBI had voiced worries on the sharp rise in outstanding credit card debt and personal loans. The RBI has taken action to reduce the perceived risks, despite efforts by banks to downplay the concerns.
Concerns About Unsecured Loans and Lending Practices
Personal Loans, The Non-Banking Financial Companies (NBFCs), which provide unsecured and personal loans, are the source of the RBI’s uneasiness. Concerns have also been expressed about the length of consumer loans, which have increased from the usual two to three years to up to five years. In response to these worries, the RBI has raised the risk weight on outstanding credit card debt and personal loans in an effort to curb the growth of these markets.
Festival Season Financing and Consumer Durable Purchases
Personal Loans, The Reserve Bank of India (RBI) noted in its monthly bulletin that around 80% of consumer durable purchases made during the festival season were made possible by consumer financing schemes that offered alluring Equated Monthly Installment (EMI) terms. It was found that a few of these loans lacked sufficient security. Top-up loans secured by depreciating assets, such as cars, were expressly addressed in the RBI circular, which led to a rule change designating such loans as unsecured. Because of this adjustment, banks and NBFCs will need to set aside more capital, which would raise borrowing costs.
Growth Trends and Regulatory Actions
Personal Loans, As of September 22, bank lending to NBFCs was reported to have grown by 26% year over year, while credit card outstandings had grown by 29% and consumer durables loans had increased by roughly 11%. Even though it is determined that banks have much more capital than is required by law, the RBI’s action shows that it is taking preventative measures to deal with future concerns. The central bank wants to make it clear that it is committed to doing more than just issuing verbal admonitions in order to preserve financial stability.
The Reserve Bank of India (RBI) has previously employed risk weights as a deterrent to lending to areas that are considered problematic. The current decision highlights the RBI’s commitment to ensure the careful management of the banking system, even in situations when immediate threats may not materialise.