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Personal loans to become cheaper as RBI relaxes norms

Sunil Dhawan
Personal loan, RBI policy, Personal loans to become cheaper, risk weight on personal loans, repo rate cut, Credit Risk Management, credit card

There is good news for those looking for personal loans. The interest rates on personal loans are set to come down soon. The Reserve Bank of India (RBI) has decided to reduce the risk weight on personal loans, the guidelines for which will be issued by the end of August.

Depending on the risk profile of the borrower, banks are required to set aside a certain amount of capital to take care of any default. All consumer credit, including personal loans and credit card receivables of the banks, have to follow the standardised approach for Credit Risk Management as set by the RBI. Currently, these two attract a higher risk weight of 125 per cent or even higher. If the risk weight is reduced, the bank will have that much of free capital to be lent again.

This is what the RBI has done as it has decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables to 100 per cent. Incidentally, the lowering is only for personal loans and leaves the risk weight for credit card receivables at 125 per cent.

"RBI’s decision to reduce the risk weight for personal loans to 100% from 125% will further boost retail lending as this move will allow banks to reduce their interest rates for Personal Loans. At the backdrop of such favouring policy changes and with festive and wedding season about to start, we expect a rise in retail lending," says Gaurav Chopra, Founder & CEO, IndiaLends.

Here is what the RBI has stated today – "Under the standardised approach for Credit Risk Management, consumer credit, including personal loans and credit card receivables, attract a higher risk weight of 125 per cent or higher if warranted by the external rating of the counter-party. On a review, it has been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%.

Personal loans are unsecured loans which are given to the borrowers without any collateral, and hence banks have to be cautious while lending them. The rate of interest varies from bank to bank and also depends on one’s occupation, source of income, risk profile and credit score. Currently, the personal loan interest rate may vary between 13 per cent and 30 per cent. With the latest RBI move, the rates of interest on personal loans may see a fall.