Banks set to increase interest rates on unsecured loans and NBFCs

Demand to slow down post rate increase

Commercial banks are set to increase interest rates on unsecured loans and also for non-banking financial companies (NBFCs) after the Reserve Bank of India (RBI) on Thursday increased risk weighting for such loans.

Due to rates hardening, loan demand for such products will be affected, bankers said.

“Interest rates on unsecured products will go up. We will observe and take a call by Monday or Tuesday,” said Sumit Bali, group executive and head of retail lending, Axis Bank.

On Thursday, the RBI increased risk weighting for unsecured loans like personal loans and consumer durables from 100 per cent to 125 per cent. 

Risk weighting for credit cards of banks increased from 125 per cent to 150 per cent and for NBFCs, it was raised to 125 per cent from 100 per cent.

Bali said Axis Bank’s exposure to unsecured loans was only 11 per cent of the total, which was Rs 8.97 trillion as on September 30, 2023.

“Eighty-nine per cent of the loan books is secured. So it is a very manageable number,” he said, adding 83 per cent of the personal loans were given to existing customers of banks.

The regulator has also increased risk weighting on bank loans to higher rated (A and above) NBFCs by 25 percentage points.

The new norms, which are effective immediately, are applicable for both new and outstanding loans.

Bank loans to NBFCs are set to go up by 25-50 basis points, depending on the profile of the borrowers.

“The interest rate on lending to NBFCs may go up by 25-50 basis points, depending on the credit and financial profile. The bank is still assessing the impact of risk weighting on capital adequacy,” said K Satyanarayana Raju, managing director and chief executive officer, Canara Bank.

A report by global rating agency S&P said the increase in risk weighting would impact Tier-I capital of banks by 

60 basis points.

Union Bank of India Chief Financial Officer P Samal said the impact of the hike in risk weighting on common equity Tier I was expected to be around 30 basis points. “The bank is reviewing lending rates for loans to NBFCs in the light of this development,” he said, adding the personal loan portfolio was Rs 12,000-13,000 crore. The NBFC portfolio, net of exemptions, is about Rs 82,000 crore.

The regulatory action on risk weighting comes amid surging growth in unsecured loans. According to the RBI data, bank credit growth has been around 20 per cent, credit card loan growth around 30 per cent, and personal loans around 25 per cent. The loan portfolio likely to be impacted due to the increase in risk weighting is about 30 per cent of the banks’ retail portfolio, which is around Rs 48.26 trillion, as at the end September.

Bankers said due to increase in lending rates, demand for such loans was likely to get impacted.

“We expect demand to slow a bit because interest rates will go up,” Bali said.

A report from Emkay Global said the fallout of the RBI action would be mainly on growth, given the rising dependence on unsecured retail loans and lending to NBFCs for growth.