The Reserve Bank of India has announced that it has tightened capital norms for lenders disbursing unsecured loans, such as personal loans and credit card receivables, to consumers. Experts believe that the central bank is trying to curb the growth of unsecured loans, which has been growing at a rate of 26% over the past five years. This move may also have a spillover effect on fintech companies that aggressively offer buy now, pay later (BNPL) schemes.
According to the Reserve Bank of India, the crackdown on lenders comes in response to the rapid growth of unsecured loans to retail customers, amid a slowdown in corporate loans. Banks and non-banking financial companies (NBFCs) have been offering top-up loans, camouflaging them as additional credit to retail borrowers, thereincreasing the risk exposure and standard of these loans. Specifically, top-up loans have been classified as unsecured loans, and the risk weight on unsecured loans like personal loans and credit card receivables has been increased, which will make it tougher for lenders to freely give out loans.
One borrower, named Suresh Chandra, shared his experience, revealing that he was inundated with offers from banks and NBFCs, prompting him to consider taking additional loans. A large private bank even offered him a top-up loan equivalent to the value of his car, while another wanted to offer a loan amounting to 150% of the part of the loan that had already been paid off. This aggressive push for loans has raised concerns about delinquencies and the associated risks.
In light of these trends, the Reserve Bank of India’s move is seen to have far-reaching implications for lenders and borrowers alike. While the central bank’s decision is expected to control delinquencies and reduce high-risk lending in the unsecured loan segment, it is also anticipated to tighten credit standards and lead to higher costs for borrowers.
This tightening of lending standards may also impact the growing buy now, pay later (BNPL) sector, as higher funding costs and increased capital requirements could affect the profitability of product offerings. As a result, fintech companies offering BNPL schemes may need to tighten credit standards or moderate loan growth.
Consumers, however, are still experiencing the lure of loans. Despite the potential challenges posed the new regulations, lenders and borrowers will need to navigate the changing landscape of unsecured lending in India, as tighter credit standards and increased costs are likely to shape the future of borrowing in the country.