The Reserve Bank of India (RBI) has decided to remove the 15 per cent cap on unsecured loans. It is, however, likely to tighten provisioning norms on such loans.
According to the existing norms, banks can extend up to 15 per cent of their total advances portfolio as unsecured loans.
Unsecured loans consist of temporary overdraft facilities offered to corporates, short-term clean loans, certain segment of personal loans and bank investments in commercial papers.
Unsecured loans are not backed by any collateral and hence, if they turn sticky, the banks take a painful hit.
The issue was discussed at a high-level meeting of RBI deputy governor G Muniappan and chief executives of select public sector, private and foreign banks on Saturday.
Banks have been lobbying for the waiver of the cap on exposure to unsecured loans. Instead, they want their boards to decide to what extent their banks can extend unsecured loans.
However, the RBI is not willing to give total freedom in this regard. The regulator, it is said, is likely to tighten the provisioning norms for unsecured loans.
Instead of a provision of 10 per cent, as is the current norm when a loan becomes sub-standard, the RBI may ask banks to increase the figure to 15 to 20 per cent.
It is also likely to ask the banks to write off such bad unsecured loans quickly in case they become a loss-making asset.
