RBI Likely To Tighten Rules On Unsecured Personal Loans As Risks Persist — NDTV Profit Exclusive

The Reserve Bank of India is preparing to introduce tighter norms for unsecured personal loans, signaling concerns on the growth and the potential vulnerabilities of retail credit, three bankers told NDTV Profit.

Conversations with bankers have revealed that the RBI has been nudging select lenders to strengthen their internal policies and urging them to set stricter thresholds for granting unsecured loans.

The central bank is also asking banks to cap the loan amounts for unsecured personal loan borrowers based on their credit scores and ratings.

"They (RBI) are thinking that we should have thresholds in terms of what kind of loans we give. There is data that says that there is stress in loans which have ticket size of Rs 50,000 and depending upon that we should have threshold for individual borrowers as to how many loans we can give," a senior banker said.

An email written to the RBI seeking confirmation on the matter did not elicit a response at the time of filing this story.

For instance, if a borrower already has two loans--home and vehicle, then the RBI is asking that banks should exercise caution and assess whether a personal loan has to be provided to the borrower or not and how it has to be granted, the banker quote above said.

While several banks already have their internal limits set, RBI wants these policies to be more clearly documented and closely monitored. This will be a double win as it will ensure robust risk management and easier regulatory inspection, another banker said.

This has come as the regulator has been conducting ongoing inspections and remains concerned on the expected rise in delinquencies of unsecured personal loans as they maybe vulnerable to shocks.

Expectations are that the RBI may release a draft notification on these guidelines, which is likely to be issued in the next fortnight, two bankers said.

In November 2023, the RBI had hiked risk weights on consumer credit provided by lenders to 125% from 100% earlier.

Personal loans rose by 14% year-on-year in March as compared with 17.6% growth in the same period a year ago, according to the RBI's monthly data. Overall non-food credit growth was up by 12% year-on-year in March, compared with 16.3% a year ago.

While demand for unsecured loans remain strong especially among private sector banks, most believe that lenders are expected to grow this segment more cautiously, going forward.

On the other hand, public sector banks don't have large unsecured loan book owing to smaller credit card portfolios.

While higher risk weights successfully slowed down the pace of unsecured personal loan growth, the RBI remains worried about the sharp rise in write-offs, according to the RBI's financial stability report of December 2024.

"An area of concern, however, is the sharp rise in write-offs, especially among private sector banks (PVBs), which could be partly masking worsening asset quality in this segment and dilution in underwriting standards," the report had said.