Banks to raise consumer loan lending rates by 30-40 bps
Lending rates for consumer loans may increase by 30-40 basis points (bps) due to the Reserve Bank of India's (RBI) recent revision of risk weight norms. Speaking to Moneycontrol, top bank executives claimed that the additional cost of funds shall be passed on to borrowers, resulting in an inevitable rate hike. They also explained that the increase in risk weight would lead to a decrease in return on equity, prompting banks to adjust rates accordingly.
Impact on personal loans and current interest rates
Unsecured loans should become more expensive as interest rates rise. Currently, HDFC Bank's personal loan interest rates range from 10.5-25% per annum, while ICICI Bank's rates range from 10.5-16%. Among government lenders, State Bank of India's (SBI) rate starts at 10.55%, and Bank of Baroda's rates range from 12.4-17.45%. To combat inflation, the RBI has raised the repo rate by 250 bps since last year, with the key rate last increased by 25 bps in February to 6.5%.
RBI's move to curb unsecured consumer loans
On November 16, RBI raised the risk weight of consumer loans of banks and non-banking finance companies (NBFCs) by 25 bps, to curb the growth of unsecured consumer loans. This move requires banks and NBFCs to set aside more capital when extending such loans, which include credit cards and some personal and retail loans. Housing loans, vehicle loans, education loans, and loans secured via gold and gold jewelry were excluded from this action.
Growth in unsecured loans and RBI's caution
Recent reports show an increase in unsecured loans by banks. HDFC Bank saw 15.5% growth in its personal loans portfolio to Rs. 1.78 lakh crore in Q2 FY24. ICICI Bank's personal loan portfolio grew 40% to Rs. 1.04 lakh crore, and its credit card portfolio increased 29.5% to Rs. 43,230 crore. Kotak Mahindra Bank's unsecured portfolio rose 50% to Rs. 38,311 crore. RBI Governor Shaktikanta Das cautioned NBFCs and banks against the high growth in some components of consumer credit.