Credit card outstandings of the enthusiastic Indian consumers surged by 30% or about a third in 12 months till August this year, as more middle class consumers bought expensive phones, televisions, refrigerators and likely took more vacations, all on their credit cards. Not just credit card dues, consumers’ frantic buying through other unsecured loans has also surged in the same period, leading to a significant increase in the total outstanding in the personal loans’ category.
Data from the Reserve Bank of India (RBI) shows that total personal loans’ (including loans for education, vehicles and housing) outstanding as of August 25 this year was Rs 47.7 lakh crore.
This was an increase of nearly 17% since March 31, 2023, but compared to August of 2022, the increase comes to a whopping 31%.
A Mumbai-based brokerage said on Thursday morning that unsecured personal loans have been growing strongly at 23%, and have crossed the 12 lakh crore mark, which it said was the second largest single sector of lending to individuals after housing.
So, while such rapid increase in purchases through credit cards and personal loans raises a question mark over consumer confidence and the actual growth of the Indian economy, it has also raised the hackles of the RBI.
Governor Shaktikanta Das had, last month, warned non-banking financial companies and others against reckless unsecured loans and now, the RBI has increased the risk weight by 25% on unsecured consumer loans as well as on banks’ exposure to NBFCs. Put simply, this means banks and NBFCs will now have to set aside more capital for backing such unsecured loans.
The brokerage quoted above said that post Covid-19, banks/NBFCs (including fintechs) have adopted an aggressive lending approach in the unsecured space. This includes hawking PLs – particularly low-value/short-term – personal loans and multiple such loans.
This, the brokerage said, “is already manifesting in the form of slight credit risk in some products/geographies. This is visible in select banks (e.g. RBL), NBFCs (SBIC) and commentary from Paytm. Thus, to curb the rising credit/pricing risk and customer overleveraging, the RBI…increased the risk weights on consumer loans (existing as well as new; and mainly including PLs and consumer durable loans) by 25% to 125%, and on cards to 150% (125% for NBFCs).”
The RBI has exempted housing loans, education loans, and vehicle/gold-backed loans from increased capital requirement. And this is a good move, since consumers are already struggling with a nearly 20% increase in equated monthly instalments (EMIs) on some of these loan categories. The EMIs have increased as the RBI had increased the repo rate (the rate at which it lends to banks) successively through the post-Covid recovery months to rein in inflation.
Now, will the latest RBI action make personal loans more expensive? You bet! The rate at which an NBFC or a bank allows you an unsecured loan will surely go up. But the RBI action comes when festival season buying is at its fag end, and in any case, it never hurts to be cautious when taking a loan.
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