The Sunday Investor: RIP credit cards & loans
In a nutshell
🏛️ RBI crackdowns on NBFCs on unsecured lending.
🪦 Subrata Roy's death leaves Rs 25,000 crore lying idle in a SEBI account.
🫡 Biden calls Xi Jinping a dictator. Not a good look.
📉 Inflation improves with October readings (4.9%) better than the July-August average (7.1%).
💳 RBI directed Bajaj Finance to stop sanctioning loans under 'eCOM' & 'Insta EMI Card'.
The big story: Loans and their ‘insecurity’ issues
If you’re looking to borrow without collateral, it’s not going to be as easy as before. RBI has made it more expensive for banks to lend money to people for personal loans, credit cards, and other unsecured loans. This means that banks will have to keep more money in reserves to cover the risk of people not being able to repay their loans.
Banks will have to keep 25% more money in reserve to cover the risk of people not being able to repay their loans. Earlier banks needed to maintain capital of ₹9 for every ₹100 they loaned, but now they will have to keep ₹11.25.
Here’s why it’ll now be harder to borrow:
- Increased risk weights for consumer credit exposure.
- Banks will have to set aside more capital to cover the risk.
- Banks may also be more selective about who they lend to.
Since the COVID-19 pandemic, due to rising consumerism and easy access to loans by retail consumers, unsecured loans have been growing at a phenomenal pace, much faster than overall borrowings in the system. Earlier this year RBI had clearly expressed their concerns regarding this growth, which in some cases was as high as 40-50% Y-o-Y for some smaller NBFCs and Banks.
By increasing the Risk Weights, RBI is trying to proactively slow down this express train before it snowballs a few years down the road. It is very likely that lending rates for consumers will move up in tandem with the cost of borrowings for such NBFCs due to tighter borrowing conditions.