Refer RBI circular dated 16th Nov 2023 : https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12567&Mode=0
Let's understand this strategic decision of RBI from a common person perspective.
The Reserve Bank of India's decision to increase the risk weight on consumer credit is beneficial for the Indian economy in the longer term.
By imposing a higher risk weight, the RBI aims to curb the excessive growth of unsecured lending, particularly in small loans and credit cards.
This helps in preventing the escalation of risks within the financial system.
The move promotes financial stability, ensuring that lending practices are more prudent and aligned with sustainable economic growth.
The above action reduces the likelihood of a debt bubble and potential financial crises.
Impact on Banks & their profitability:
Increased Costs: Higher risk weights lead to increased capital requirements, raising the cost of offering consumer credit.
Reduced Profit Margins: Banks may experience reduced profit margins on unsecured loans due to elevated capital requirements.
Stricter Lending: The measure may prompt banks to adopt more cautious lending practices, affecting the volume of consumer loans.
Impact on Stock Prices: The announcement could lead to a temporary decline in bank stocks as investors react to the potential impact on profits and lending activities.
Impact on common people:
Higher Interest Rates: Common people may face higher interest rates on unsecured loans, including personal loans and credit cards, as banks pass on the increased costs.
Reduced Access to Credit: Stricter lending practices might lead to more stringent eligibility criteria, limiting access to credit for some individuals.
Impact on Spending: Higher interest rates could impact disposable income, potentially affecting consumer spending habits.
The above changes exclude housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.
In conclusion, while common people may face higher loan costs, the measure is a prudent step to prevent excessive risk-taking, ultimately benefiting consumers by preventing excessive debt buildup and financial crises.
While it may temporarily impact banks and individuals, this strategic measure safeguards the economy, fostering a balanced and sustainable lending environment for the benefit of the long-term economic health of the nation.