The Reserve Bank of India (RBI) on Wednesday reduced the risk weight for consumer loans from 125% to 100%. The move will allow banks to reduce the interest rates on personal loans.
According to RBI guidelines, banks have to set aside a percentage of the loan amount, depending on the risk perception of a loan type. Now, with the cut in risk weightage, banks will have more capital to lend and, therefore, consumer loans could become cheaper.
RBI data showed that outstanding consumer credit, or personal loans, excluding credit card outstanding, stood at ₹21.59 trillion at the end of June, an increase of 16% from ₹18.59 trillion a year ago.
Arijit Basu, managing director, State Bank of India (SBI), said theoretically, now there is a chance of lowering the price of such loans for banks, but one has to also look at other inherent risks in a portfolio.
“When capital requirements come down, you are able to have some leverage on pricing. This would largely affect banks which have not priced their loans already at a low rate as they could have the space for better pricing," he added.
RBI’s move could help improve consumer durable sales, a segment that has suffered the most among the personal loan category, declining 71.5% year-on-year (y-o-y).
RBI governor Shaktikanta Das said some banks have reduced interest rates by 29 bps (February-June).
“(Risk weight cut) will also facilitate better flow of credit," said Das.
The central bank expects banks to pass on more of the repo rate cuts to consumers.
Soon after RBI’s policy announcement, SBI said it will lower its marginal cost of fund-based lending rate (MCLR) by 15 bps across all tenors. SBI’s one-year MCLR will be at 8.25% from 10 August.