Last week, The Reserve Bank of India increased ‘Risk Weight’ for ‘Consumer credit exposure’ for retail loans for Commercial Banks & Non-Banking Financial companies.
For commercial banks its increased to 150% from 100% earlier. For NBFCs its increased to 125% from 100% earlier. It also includes banks exposure to NBFCs for this purpose.
Risk Weight simply means, ‘the capital to be set aside for this purpose by banks & NBFCs’. With this increase in %, Banks & NBFCs need to look for further capital requirements to fulfill RBI’s guidelines.
This includes, Personal loans, credit card spending, & other retails loans excluding Housing loans, Vehicle loans, Gold loans & education loans.
Why this move is important?
In the recent past, we have observed increasing exposure to personal loans, credit card spending & the retail loans which fall under ‘unsecured’ category.
Loan amount of as low as RS 10,000 & tenure as less as 4/5 months was also seen in the demand book by customers. To buy mobile phones or gadgets, home appliances etc people opt for such loans.
With this increase, though banks & NBFCs were getting quick business, the risk of delay or default was also on the rise.
It’s important to have ‘consumption growth’ in the economy but it is equally important to be ‘financially stable’.
That is why RBI took this important step so that banks & NBFCs will have additional capital set aside for this purpose.
What are the likely after effects of this move?
With the requirement of additional capital, banks & NBFCs will need to make sure that the have the sufficient capital as per RBI guidelines.
The hence may need to raise capital for this purpose.
As it may come with a cost, it will attract further escalation of cost to end borrowers. Some NBFCs do have alignment with Fintech platforms to serve the purpose, it will add up to the cost for them further.
Let’s deep dive into reasons behind this increased exposure to personal loans & Short term consumer credit:
If we sit & think, we realize that, many of us have started spending more than before.
Obviously, reasons are personal but still there are some reasons which push us to buy things that we either need or want with the help of short-term loans.
- Need for some & want for many:
Today, all exclusive brands, shops & outlets are available easily. Even in Tier II & Tier III cities, people have started gaining access to all these items which were once a ‘dream buy’ for them.
Mobiles, gadgets, consumer durables, home appliances, etc are available easily. Buying them is a ‘need’ for some while many ‘want’ to buy them either to upgrade existing ones or to have additional ones in their kitty.
- Emotional Purchase:
Collogues, friends, relatives, neighbors share their stories about such expensive purchases. Many of us listen & try to upgrade their belongings.
On the other hand, on some special occasion, or during festivals, we often opt for ‘emotional purchase’.
When emotions win over, we fail to apply practicalities & logical reasons while buying something
- Easy availability of loans:
Today, we can buy/ purchase things we want with ‘quick credit’ available. ‘Many brands & outlets come with different discount offers, ‘buy now & pay later’ schemes.
On the other hand, personal loans, credit cards are easily available too.
This helps us to purchase things when we want.
- Rising Aspirations:
Our aspirations are constantly rising. Many of us are ‘not content with what we have /possess’. This leads to constant urge to upgrade our lifestyle, possessions.
We often spend by following these aspirations. Easy money available via ‘easy credit options’ makes this purchase easy.
If these are some reasons behind increased use of personal loans, credit cards etc, we can also ‘plan our purchase well’ .
How can we go about it?
- Find out the ‘Why’, behind any such purchase:
Its good to buy things or avail services we wish to but we should also ask ourselves one question first…
‘Why am I thinking to buy/ avail this?’
When our mind is clear about the reason, we distance ourselves from any emotional purchase.
If the good or service will add value to our life, then is worth a purchase.
Many purchases may lead to ‘problem of plenty’ if we add them in our kitty without any concrete reason.
- Apply ‘Budgeting’:
Budgeting doesn’t mean ‘spending less’. It means, ‘spending within our means’.
Budgeting helps us monitor our income & expenses well. It gives us clarity on our own money, spending, spending patterns.
Budgeting also, gives ‘discipline’.
We can thus plan big purchases well in advance.
- Investment Planning:
When there is a ‘goal assigned’ to your investments, investing helps us to achieve the goal. Big purchases can be planned well when our investment tenure & goal is clear.
For short term, we can opt for ‘recurring deposit or SIP in debt liquid fund’.
We have investment options available, where they can help us to achieve our goals if we invest suitably.
Personal loans, short term credits, credit cards etc are available for us for our good. Overspending using them
Will surely make our own personal finance unhealthy.
Let’s be thoughtful while spending!