RBI norms: Banks may hike rates by 30-40 bps on consumer loans

Moneycontrol reported on November 17 that banks and NBFCs will look at raising their interest rates.

Lending rates of certain types of loans may be increased by 30-40 basis points after the Reserve Bank of India revised their risk weight norms, the chiefs of three top banks told Moneycontrol.

A rate hike is inevitable as the additional cost of funds following the RBI action will be passed on to borrowers, they said, declining to be identified because the decisions are pending.

"An increase in risk weight will result in return on equity coming down and hence, banks will make some rate changes. On the personal loan front, expect a change of 30-40 bps or even more in the lending rates,” one of the bankers said.

A rise in interest rates will make unsecured loans costlier. Since last year, the RBI has increased the repo rate by 250 basis points to tame inflation.

Also read: RBI’s risk weight norm will not affect our business: ESAF SFB MD and CEO

The key rate was last increased by 25 basis points in February to 6.5 percent, the highest level in over five years.

Interest rates on HDFC Bank’s personal loans currently range from 10.50 percent to 25 percent per annum for a tenure of three months to 72 months, according to its website.

ICICI Bank’s website showed that the rates range from 10.50 percent to 16 percent. Among public sector lenders, State Bank of India’s interest rate starts at 10.55 percent, while those of Bank of Baroda range from 12.40 percent to 17.45 percent.

More capital

The central bank increased the risk weight assigned to consumer loans of banks and non-banking finance companies by 25 percentage points on November 16 to curb the proliferation of unsecured consumer loans. This means banks and NBFCs must set aside more capital while extending such loans. Consumer loans include credit cards, some personal and retail loans.

“To balance our rising capital, we will work on raising rates by around 40 bps," another top banker said.

A third banker aired similar views, saying his bank too would raise rates, depending on market conditions.

Dinesh Khara, chairman of State Bank of India, the country’s largest lender, said earlier that the rise in cost of funds will result in a jump in rates.
“The bank will look at raising interest rates if the cost of funds goes up,” Khara said.

Moneycontrol reported on November 17 that banks and NBFCs will look at raising their interest rates.

Housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery were excluded from the action after assessing that no stress was building up in these segments at the moment. The RBI had also increased the risk weight on credit given to NBFCs.

Of late, there has been a sharp rise in unsecured loans by banks. HDFC Bank, the country’s largest private sector bank, reported a growth of 15.5 percent in its personal loans portfolio to Rs 1.78 lakh crore in the second quarter of FY24.

Also read: MC Explains: What are the different risk weightage norms for bank loans

ICICI Bank’s personal loan portfolio grew 40 percent to Rs 1.04 lakh crore and its credit card portfolio increased 29.5 percent to Rs 43,230 crore in the July-September quarter.

Kotak Mahindra Bank’s unsecured portfolio rose 50 percent to Rs 38,311 crore.

After the October Monetary Policy Committee meeting, RBI governor Shaktikanta Das flagged the high growth in certain components of consumer credit and had cautioned banks and NBFCs against it. Das said that there is a need to strengthen internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.

“The need of the hour is robust risk management and stronger underwriting standards,” he said.