Your Personal Loans Could Cost 25-100 Basis Points More After RBI Tightens Rules

If banks pass on the burden of extra capital requirements to borrowers, personal loan rates are likely to inch up.

<div class="paragraphs"><p>Source: Vijay Sartape for BQ Prime&nbsp;</p></div>
Source: Vijay Sartape for BQ Prime 

The central bank's move earlier in the week to raise the cost of undertaking unsecured lending by banks could result in your personal loans costing anywhere between 25 basis points and 1 percentage point more, according to bankers.

A basis point is one hundredth of a percentage point or 0.01%.

On Thursday, the Reserve Bank of India raised risk weights on unsecured personal loans, consumer durable loans and credit card dues in a bid to curb aggressive lending in these sectors by both banks and non-banking financial companies. Such loans will now have a risk weight of 125% versus 100% earlier. The restrictions won't apply for mortgages, loans for vehicle purchases and education as well as debt backed by gold.

"It could be anywhere between 50-75 basis point increase straight," Virat Diwanji, group president and the head of consumer banking at Kotak Mahindra Bank told BQ Prime in an interview on Friday. "If you translate the cost of incremental capital to lending rate, back of the envelope calculations tell me that it will be 50-75 basis points," he said.

However, he admitted that this would likely change based on the situation on the ground, where lenders have been engaged in a furious battle. Lenders, as a result, may decided to take a hit on pricing if they wish to acquire what they perceive as a good borrower.

This was echoed by Sumit Bali, group executive and head-retail lending, Axis Bank.

“My sense is that the personal loan market should see a 50-75 basis point (increase). It could vary from institution to institution, but I think that is the ballpark number it will increase. And therefore the expectation is also that it will slow down the growth in the unsecured book,” he said.

Another factor that will determine the quantum of increase is the extent to which the lender is capitalised, according to Ashutosh Khajuria, former executive director, Federal Bank said in a separate interview with BQ Prime.

"Right now, banks are very well capitalised, (and) as a result of which they may not see an immediate impact for capital," he said. "But because capital is getting consumed, the pricing may increase. That again would depend on which bank is sitting on what base. It can’t be uniform."

According to Khajuria, some banks may raise interest rates by 1 percentage point, while others may simply have a 25 basis point increase.

Unsecured retail loans have been growing by 20-60% year-on-year across major lenders. This rate of growth has been a cause for concern as highlighted by the regulator in recent months.

Higher lending rates to banks and non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non banks, according to ICRA.

It remains to be seen whether they exercise this option. "High growth aspirations, high competitive intensity and higher capital levels might lead to banks taking this hit rather than passing it on to borrowers," stated a research note by Ambit Insights on Friday.

With the new risk weights, banks could slow down on unsecured loans and lending to NBFCs, the note by Ambit Insights stated. This could mean slower loan growth too.