If banks pass on the burden of extra capital requirements to borrowers, interest rates on personal loans are likely to inch up.
Consumer loans will attract a credit risk weight of 125% compared with 100% earlier, the central bank had stated in its circular on Thursday. For non-banking finance companies, too, consumer loans will attract a risk weight of 125%. This effectively means that banks will have to set aside Rs 125 in provisions for every Rs 100 of consumer credit. Such lending includes personal loans, but excludes home, education, vehicle, gold and microfinance loans.
“These announcements are expected to result in higher capital requirements for the lenders and hence an increase in lending rate for the borrowers,” stated a research note by ICRA.
A research note by Motilal Oswal Financial Services also stated that lenders could increase interest rates to offset the impact on profitability. There have been concerns about higher delinquencies in low-ticket personal loans, but clearly the RBI has not made any such distinction and has taken measures to curb the growth across retail segments, it added.
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.