RBI’s consumer credit crackdown: Long-term resilience over short-term growth

The Reserve Bank of India’s (RBI) recent circular, which tightens norms on consumer loans and credit cards, has sent India’s financial sector into a tizzy.

The central bank introduced a 25% elevation in risk weights for consumer credit exposure among commercial banks and non-banking finance companies (NBFCs). Notably, this modification applies to both existing and new credit, with a specific focus on personal loans. Housing loans, vehicle loans, and loans secured by gold and gold jewellery are exempt from this adjustment since these loans are secured collateral.

The RBI’s move was a long time coming. In its October monetary policy, RBI Governor Shaktikanta Das raised concerns about the rapid growth of certain consumer credit segments. Indeed, the consumer credit and credit card sectors have experienced notable expansion in recent years. For instance, in the five months ending August 2023, the total credit extended to the personal loan segment rose 16.8% to Rs 47,70,000 crore. In the same period a year prior, the rate of growth was a markedly more sober 7%.

The RBI's move aims to mitigate the emerging risks within these segments by implementing measures to curb potential risk accumulation. This is poised to have significant implications not only for fintech companies but also for the broader banking sector. It could increase the cost of prime unsecured lending by 35-40 basis points, and up to 75-100 basis points for fintechs, contingent on the strength of their balance sheet.