RBI's Risk Weight Adjustment Spells Potential 30-40 Basis Points Hike In Loan Rates, Find Details

In a significant development, lending rates for specific loan categories could witness a surge of 30-40 basis points, as top bank executives reveal the imminent repercussions of the Reserve Bank of India's (RBI) recent revision of risk weight norms. According to insiders who spoke with Moneycontrol, this adjustment is poised to pass on additional funding costs to borrowers, making unsecured loans more expensive.

The undisclosed bank chiefs assert that a rate hike is virtually unavoidable in the aftermath of the RBI's proactive stance to address the growing risk associated with certain loan types. This comes as part of the RBI's ongoing efforts to maintain financial stability and rein in inflation, especially considering the 250 basis points increase in the repo rate over the past year. Notably, the key rate reached 6.5% in February, marking the highest level in over five years.

The impact of this potential rate hike is already evident in the interest rates currently offered by major banks. HDFC Bank's personal loans range from 10.50% to 25% per annum, according to information on its website. Similarly, ICICI Bank's rates span from 10.50% to 16%, while State Bank of India starts at 10.55%, and Bank of Baroda's rates vary from 12.40% to 17.45%.

The central bank's move to increase the risk weight assigned to consumer loans for both banks and non-banking finance companies (NBFCs) by 25 percentage points on November 16 aims to stem the proliferation of unsecured consumer loans. This entails these financial institutions setting aside more capital when extending such loans. It's noteworthy that this adjustment excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery from rate hikes, as the RBI assesses that no stress is currently building up in these segments.

Recent reports indicate a substantial surge in unsecured loans by major banks. HDFC Bank, the largest private sector bank in the country, reported a remarkable 15.5% growth in its personal loans portfolio to Rs 1.78 lakh crore in the second quarter of FY24. Similarly, ICICI Bank saw a 40% uptick in its personal loan portfolio, reaching Rs 1.04 lakh crore, and a 29.5% increase in its credit card portfolio to Rs 43,230 crore in the July-September quarter. Kotak Mahindra Bank's unsecured portfolio also soared by 50% to Rs 38,311 crore.

After the October Monetary Policy Committee meeting, RBI Governor Shaktikanta Das expressed concern about the rapid growth in specific components of consumer credit. He cautioned banks and NBFCs against this trend, emphasizing the need to strengthen internal surveillance mechanisms, address potential risks, and institute suitable safeguards in their own interest. "The need of the hour is robust risk management and stronger underwriting standards," Das emphasized.

For those considering home loans, the current rates offered by the top five Indian banks are as follows:

State Bank of India: 8.40% onwards per annum
HDFC Bank: 8.45% onwards per annum
ICICI Bank: 8.75% onwards per annum
Kotak Mahindra Bank: 8.75% onwards per annum
Axis Bank: 9% onwards per annum

As the financial landscape undergoes these adjustments, borrowers are urged to stay informed and factor in the evolving interest rate scenario when making financial decisions. The potential hike underscores the importance of prudent financial planning in navigating these uncertain times.