RBI may tighten norms for banks’ unsecured lending

RBI is looking to tighten scrutiny on the unsecured lending portfolios of banks amid the growing risk of potential defaults, four banking sources told Reuters.

Unsecured loans – mostly personal loans and credit cards – do not carry any collateral and therefore pose a higher risk of default. These loans, however, are a big contributor to margins as they entail higher interest rates.

“Some action from the RBI on unsecured lending, credit cards, etc. could be seen,” a senior source aware of the central bank’s thinking said. “Excessive growth is the first sign of potential delinquencies.”

None of the sources wanted to be named because they are not authorised to speak to the media.

“We can expect the RBI to increase risk weights on unsecured personal loans and credit cards and, or, float a discussion paper on how to monitor the space more efficiently,” said the head of credit card vertical at a private sector bank.

As per RBI norms, the risk weights – or the capital that the banks need to set aside for every loan – on unsecured personal loans and outstanding on credit cards currently stands at 100% and 125%, respectively.