Are you facing short-term credit issues? Opt for a secured credit card

Invest in liquid and short-duration funds to finance short-term spending goals

The Reserve Bank of India (RBI) has increased the risk weighting for lenders offering unsecured loans. 

This is a pre-emptive measure to curb bad loans in the unsecured loan books of banks and non-banking financial companies (NBFCs).

According to Jatinder Handoo, chief executive officer (CEO), Digital Lenders Association of India, “The prime and super-prime segment will continue to get good deals. However, people with a low credit score or no credit history, first-time job market entrants, and those with low incomes trying to enter the formal financial system will face some challenges in accessing small-ticket loans.”

Costs may rise, availability may tighten

Banks and NBFCs will be forced to set aside more capital for offering unsecured loans. This is expected to affect the pricing, and to some extent, the supply of unsecured loans, including buy now, pay later (BNPL), EMI-based and small-ticket loans. Already, players like Paytm have announced they will cut down their exposure to sub-Rs 50,000 loans.

Two types of borrowers go for small-ticket loans: those who borrow for need and those who do so for convenience.

The first type may continue to avail of small-ticket loans even if interest rates inch up slightly. Says Handoo: “A 1-2 percentage point increase may not make much of a difference so long as credit is available on time and adequately, at least among customers with the capacity to repay.”

In the worst-case scenario, however, Handoo fears they may move to informal channels like money lenders, unauthorised apps.

Customers with strong credit profiles, who use BNPL for convenience (smooth transactions, no need to punch in an OTP), may not be affected much as they are likely to continue getting access to unsecured loans.

 Alternative sources of credit

Customers who find it hard to get an unsecured loan (due to lack of credit history or poor credit score) should consider going for a secured loan. Says Saahil Arora, chief business officer (unsecured loans), Paisabazaar: “Since these loans are backed by collateral, there is a higher chance of approval. The interest cost is also lower than for unsecured loans.”

Adhil Shetty, CEO, BankBazaar suggests opting for a loan against fixed deposits (FDs). 

Gold loans are another option. Says Raj Khosla, founder and managing director, MyMoneyMantra.com: “These are secured loans offered against gold jewellery. They are readily available, require minimal documentation, and offer competitive interest rates compared to unsecured loans.”

Those finding it difficult to get a regular credit card should try to obtain a secured card. Says Shetty: “These cards can be obtained against FDs and can help customers revolve small funds.”

People who are members of cooperative societies should consider going for loans offered by them.  

The long-term solution is to build a sound credit history and credit score so that access to formal credit becomes easy.

Invest for short-term goals

Data indicates that the propensity to save is declining and people are increasingly resorting to borrowing. Households’ net financial savings fell to a five-decade low of 5.1 per cent of the gross domestic product (GDP) in 2022-23 (FY23), compared to 7.2 per cent in 2021-22 (FY22). Financial liabilities of households, on the other hand, have risen, from 3.8 per cent of GDP in  FY22 to 5.8 per cent in FY23, according to RBI data.

Experts say that if credit conditions tighten, then saving and investing to meet short-term financial goals is an option that always remains open to people. 

Says Khosla: “Recurring deposits are low-risk investment options where you invest a fixed amount regularly. They offer guaranteed returns and are ideal for short-term goals.”

Liquid funds offer high liquidity and provide better returns than traditional savings accounts. Adds Khosla: “Investors with a horizon of one to three years can invest in short-duration mutual funds to meet their short-term investment goals.”