How RBI’s New Regulations on Consumer Credit Will Affect Fintech Lenders
On November 25th, 2023, the Reserve Bank of India (RBI) announced that it would be tightening regulations for consumer credit by requiring banks and non-banking financial corporations (NBFCs) to assign a higher risk weight for unsecured personal loans. Though this change will not apply to housing loans, education loans, vehicle loans, and gold loans, these new regulations will still impact the fintech industry.
Fintech Lenders May See the Most Impact on Costs
According to Nikhil Aggarwal, Founder & CEO of Grip, fintech lenders and the peer-to-peer (P2P) industry may experience the most dramatic increases in costs due to this change, stating, “More than just the increase in the cost of financing, the recent RBI action is clearly a yellow flag for lenders in unsecured personal loans to relook at underwriting thresholds. There are early signs that the rapid growth in disbursements to this borrower profile may result in stressed portfolios and higher NPAs. Just by the nature of how banks allocate capital, our sense is that new-age lending fintechs and the P2P industry may see the maximum increase in cost of finance with NBFCs also being impacted but to a lesser degree.”
RBI Governor Flagged the Growth of Consumer Credit
The move came just a month after RBI Governor Shaktikanta Das expressed concerns about the high growth witnessed in the consumer credit segment. In its circular, the RBI stated, “It has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, by 25 percentage points to 125 per cent.”
Lending in Unsecured Segments May Get More Expensive
Ameet Venkeshwar, Chief Business Officer at LoanTap, stated, “While it will allow more cover for credit risk in the unsecured loan segment, it will make lending in the unsecured segment more expensive for banks and NBFCs which will, in turn, make unsecured loans more expensive for the borrowers.”
Risk Weights on Credit Cards Have Increased
The new regulations have resulted in a 25 percentage point increase in risk weights on credit card exposures to 150 per cent and 125 per cent for banks and NBFCs, respectively. However, according to Aishwarya Jaishankar, Co-Founder, and COO, of Hyperface, while this may initially curb new credit issuance, a more extensive examination of the RBI data indicates a significant 29% year-over-year (YoY) growth in credit card outstandings, surpassing the 20% YoY increase in the total credit card customer base. This data suggests that customers are increasingly leveraging their credit. Furthermore, with roughly 3% unique credit card holders in India, the emergence of RuPay Virtual cards linked to Unified Payment Interface (UPI) offers hope for expanding the new-to-credit card segment. As banks exercise caution with existing users due to tightened funds, the gradual book build-up from new cards mitigates the risk of excessive limit utilization.
New Regulations Do Not Apply to Specific Types of Loans
According to the RBI circular, the new regulations will not apply to housing loans, education loans, vehicle loans, and gold loans.
RBI Advises Banks and NBFCs to Strengthen Surveillance Mechanisms
Following the announcement of these new regulations, RBI Governor Shaktikanta Das advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, and institute suitable safeguards, in their own interest.
In conclusion, the Reserve Bank of India’s recent tightening of consumer credit lending regulations is set to have a considerable impact on the financial industry, particularly on fintech lenders. While this move to increase the risk weights may improve the coverage of credit risk, lending in the unsecured segment may become more expensive for banks and NBFCs, which may in turn incur higher costs for borrowers. Nonetheless, it is hoped that these regulatory measures will result in the strengthening of surveillance mechanisms and better risk management protocols within the industry.
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