Interest Rates on Personal Loans Rise After RBI's Risk Warning

Mumbai: According to the disclosures made by each bank, private lenders including HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank have increased lending rates on personal loans by 30 to 50 basis points (bps) in the last few months following the Reserve Bank of India's (RBI) decision to raise the risk weighting for such loans from 100 percent in November 2023 to 125 percent.

In order to lessen the possible impact in the event that asset quality declines, banks are also tightening the underwriting requirements for these loans. One hundredth of a percentage point is called a basis point. 
From April onwards, HDFC Bank has been providing personal loans with a minimum interest rate of 10.75 percent annually, which was previously 10.35 percent from January to March. 

Interest rates on personal loans at Kotak Mahindra Bank began at 10.99 percent, having increased from 10.50 percent at the time of the announcement of the increase in risk weights.

According to Virat Diwanji, head of consumer banking at Kotak Mahindra Bank, "most financial institutions have passed on the increase in cost to the customer as far as the rate scenario is concerned due to the rise in risk weights." "The rate on personal loans will increase by 25 to 50 basis points. About the personal loan portfolio, I don't have any nightmares about it." 

In a similar vein, personal loans from ICICI Bank have an interest rate of 10.80 percent. The rate was approximately 10.50 percent when the risk weights were raised by the RBI. ICICI Bank stated that "it has improvised the credit filters in the personal loan segment as a risk measure and has also increased the pricing of new personal loans" in a recent meeting with brokerage company Motilal Oswal's top management. "However, currently no adverse trends were seen in the unsecured portfolio," stated the report.

In order to maintain steady growth and portfolio quality, the private lender will also keep tightening its underwriting standards for unsecured loans. Following the RBI's announcement of risk weights, Axis Bank raised the interest rate on personal loans from 10.49 percent to 10.99 percent.

The RBI ordered banks to set aside additional capital as risk weights for loans made to non-banking financial firms, credit cards, and unsecured personal loans in November of last year. This action was taken to control the excessive rise of these loans.