Crackdown on proliferation of unsecured personal loans
Unsecured loans are characterised by absence or inadequacy of collateral, and therefore, they present a higher credit risk for banks in the event of defaults.
NEW DELHI: After raising the red flags on many previous occasions, the banking regulator in November finally decided it had enough. So, the RBI on November 17 increased the risk weight of unsecured personal loans from 100% to 125% for banks and non-banking financial companies (NBFCs). For credit card loans, the risk weight has been increased from 125% to 150% in case of banks and from 100% to 125% for NBFCs.
Unsecured loans are characterised by absence or inadequacy of collateral, and therefore, they present a higher credit risk for banks in the event of defaults.According to RBI’s latest report, the share of unsecured advances in total credit of scheduled commercial banks has been increasing since end-March 2015, reaching 25.5% by end-March 2023. More than 50% of loans by foreign banks are unsecured, while the share is lower at 27.3% and 22.6% for private banks and public sector banks, respectively.
Deputy governor Swaminathan Janakiraman while interacting with the media in early December had said efforts were made over the past 3-4 months by sensitising the players to put adequate internal measures to ensure that the risk build-up is avoided. However, since the market was not responding to the warnings it was necessary to take certain measures.
Comments are closed.