Banks Exercise Caution as RBI Tightens Screws on Personal Loans

The Reserve Bank of India's (RBI) recent data reveals a noticeable slowdown in the growth of unsecured personal loans, signalling a cautious stance adopted by banks in response to regulatory concerns. According to RBI data, the year-on-year growth of unsecured personal loans dipped to 23.1% in February, down from 24.4% in January and 27.6% in December 2023. Similarly, the growth in consumer durable loans eased to 14.6% in February, and credit card outstanding declined to 31% from 40% in December.

This moderation in personal loan growth follows the RBI's decision to increase risk weights on unsecured loans in November last year. The central bank aimed to curb the rapid expansion of personal loans by raising the cost of funds for lenders. By mandating a 25 percentage point increase in risk weight requirements for unsecured personal loans, credit cards, and lending to non-banking financial companies (NBFCs), the RBI sought to address concerns over unchecked growth in personal lending.

RBI Governor Shaktikanta Das emphasised the need for lenders to exercise caution and reduce reliance on unsecured loans, highlighting the potential risks associated with such lending practices. The regulatory measures implemented by the RBI highlight its dedication to upholding financial stability and averting the accumulation of undue risks within the banking system.

In addition to regulatory actions, the moderation in personal loan growth can also be attributed to the absence of festival-led demand in January and February. Following a surge in demand during the festive period in November and December, the subsequent lull in consumer spending contributed to the subdued growth in personal loans.

Looking ahead, the trend suggests a continuation of moderated growth in personal loans throughout the current financial year as banks navigate the evolving regulatory landscape and adjust their lending practices accordingly. While the RBI's measures may temporarily slow down credit expansion, they ultimately serve to promote a healthier and more sustainable lending environment, mitigating risks for both lenders and borrowers alike.