Will RBI Move Against Unsecured Lending Reduce Dependence On Personal Loans?

Gargi Reddy, 32, a Bengaluru-based finance professional, bought a smart TV recently worth Rs 85,000. She made a down payment of Rs 5,500 and took a loan on the balance amount. The transaction was facilitated through Bajaj Finance’s no-cost equated monthly instalment (EMI) product Insta EMI. Reddy could now pay the remaining amount in instalments over a period of six months.

On the face of it, this seems easy on the pocket as the immediate financial impact is seemingly to the tune of Rs 5,500 only. But what gets ignored in the process is that the customer ends up paying more in EMIs. A processing fee is added to the first monthly EMI and the EMIs for the rest of the months have Goods and Services Tax (GST) added. Reddy’s monthly instalments for six months were around Rs 14,000 and after adding GST she ended up paying close to Rs 15,000. By the end of six months, the total value of the TV became roughly Rs 90,000.

“The invoice generated doesn’t include the processing fee, but I not only made the down payment for the appliance and paid the processing fee, rather the first instalment includes several other components of tax and eventually, I ended up paying considerably more than just the EMI amount of the appliance,” Reddy told The Core.

Reddy is one among many Indians who opt for such quick personal loans easily made available by companies like Bajaj Finance, one of India's largest consumer lenders. The Reserve Bank of India (RBI) has, for long, been flagging the surge in unsecured small-ticket personal loans disbursed by non-banking finance companies (NBFCs). The RBI recently barred Bajaj Finance from issuing loans under two products, eCOM and Insta EMI Card, with immediate effect, due to deficiencies in adhering to digital lending guidelines.

What Is RBI’s Issue With Bajaj Finance?

Consumers get pre-approved credit up to Rs 2,00,000 for small purchases on Bajaj Finance’s Insta EMI card. The company's website, however, does not have any description available for its eCOM product.

The RBI’s ban on Bajaj Finance’s EMI cards was necessitated due to the company’s non-adherence to the RBI’s digital lending guidelines, particularly non-issuance of key fact statements to the borrowers under these two lending products. There were also other deficiencies in the key fact statements issued for other digital loans sanctioned by the company, the RBI had said. No-cost EMIs by other banks continue to be available.

"The RBI has not done this across all the issuers of the insta EMI or no cost EMI products. RBI just banned the Bajaj Insta EMI for some different aspects. RBI is just keeping a check on whether the communication is correct to the customers or the disclosure of the (interest) rates getting charged," said Jinay Gala, associate director at India Ratings & Research.

After the RBI announcement, Bajaj Finance had said that they were expecting the ban to be lifted within the next 45-90 days. The company said that it would address RBI’s concerns with aspects of the products within two to three weeks, after which the RBI could review and approve the changes in the next four to five weeks. On Tuesday, the company issued another statement on its website saying that it was temporarily suspending the disbursal of loans under its online loan products ECom and Insta EMI. However, the company would continue to finance products in their offline partner stores.

“Such loan products will continue to be there as long as they abide by the regulatory guidelines set by the RBI. They are just setting restrictions that certain products are allowed and some are not allowed, as per their regulatory thought process. The product needs to meet regulatory standards,” said Sanjay Agarwal, senior director at CARE Ratings who tracks the NBFCs sector.

RBI’s Warning To NBFCs Overall

While this ban is specifically directed at Bajaj Finance’s products, the RBI has been sounding alarm bells about the rise in small-ticket unsecured personal loans by NBFCs in general too. To address that, the RBI last week increased risk-weights to 125% from 100% on unsecured personal and consumer durables loans and credit cards issued by NBFCs. This would make availing these loans expensive for borrowers. The RBI has been particularly concerned about NBFCs, which are net borrowers of funds from the financial system and have a large exposure to banks.

RBI’s recent measures will now force other NBFCs to also be cautious about small-ticket lending. Its actions are directed towards keeping a check on possible alleviation of systemic risk in the banking sector due to increasing exposure to NBFCs. A report by CareEdge Ratings found that banks’ exposure to debt of NBFCs rose 25.8% year-on-year to Rs 13.8 lakh crore in August 2023. This took the share of NBFC credit, as a percentage of total bank credit, to 9.3% from 8.8% a year ago.

“The sudden pace in the growth of loan disbursements by the NBFCs is a concern. RBI has put in process which provides negative incentive on banks funding NBFCs, by way of changing the regulatory guidelines. The main concern with unsecured consumer lending products is the overall pace of growth, whether disbursed by online or offline means,” said Sanjay Agarwal, Senior Director at CARE Ratings and head of BFSI sector.

Has Financing Been Completely Banned?

To understand how consumer products are being purchased following the ban on Bajaj Finance’s products, The Core visited several retail chains across New Delhi. After doing several rounds at Reliance Digital, Bajaj Electronics, Croma, and Vijay Sales, among others, we found out that Bajaj Finance was financing purchases made in physical stores and the ban was only applicable on online transactions.

"The customers can avail instant loan with zero EMI for offline purchases, however, the same facility will be unavailable online. But for any offline purchases, customers can get a new Bajaj Insta EMI card issued too. So, the customers need to select the appliance worth more than Rs 7,000 and thereby apply for financing and get the card by completing the KYC process," a Bajaj Finance representative at a Croma store in the National Capital Region told The Core.

The availability of easy personal loans highlights a larger problem — the emergence of a new generation of consumers heavily dependent on loans. Young professionals are choosing to pay everything, from rent to utility bills, through personal loans. Digital lending platforms like Cred and other housing apps like MagicBricks and NoBroker provide the options of paying house rents using credit cards or taking small ticket instant loans. However, the processing fees for the same varies from 2% to 4% and the interest rate also varies from 20% to 40%.

The dependence on credit is not just limited to necessities like rent or medical emergencies. Indians are taking loans to travel, keep up their lifestyles and often live outside their means by taking credit. RBI’s recent measures would now make it difficult to avail personal loans this easily.

Loans To Get Expensive

The rising reliance of NBFCs on banks for funding has been a cause of concern given the ballooning unsecured retail credit portfolios of NBFCs. High exposure to such entities also leads to banks having more indirect exposure to high-risk, unsecured portfolios beyond their own lending in these segments.

Not only would a smaller pool of money make NBFCs judicious about lending, raising the risk weightage would lead to an increase in the interest rate of credit cards and personal loans. This could make it difficult for people to get credit cards or personal loans. If interest rates on existing credit card balances or personal loans increase due to increased risk weightage, it would eventually have a direct impact on consumers who already have outstanding debt, thereby increasing the monthly payments and overall borrowing costs for existing borrowers. But that may not happen immediately.

“However, the interest cost for the NBFCs lending will not increase immediately but as demand picks up and the supply of money is restricted, then the interest rates will go up. NBFCs don't have the pricing power to increase the interest rates right away. With the demands going up, they can then pass on higher costs, so eventually, the rate on the loans will increase," Prakash Diwan, NBFC analyst associated with Bering Capital Fund and former director of Altamount Capital Management.