RBI’s Stricter Measures Raise Concerns for Consumer Durables Sector

The recent decision by the RBI on unsecured loans is causing concerns about shrinking margins for consumer durables companies.

The growing issue of unsecured loans in India has become a cause for concern. The RBI, noticing an increase in unsecured consumer loans such as personal and credit card loans, has made a significant decision. The RBI has decided to increase the risk weights for consumer lending, raising the buffer reserve to 25% for banks and NBFCs distributing consumer loans.

After this decision, there are speculations that personal loans may become more expensive. Simultaneously, consumer durables companies are anxious about the stringent measures on unsecured loans imposed by the RBI.

What’s Happening?

According to RBI data, compared to August 2022, personal loans grew by 23%, and credit card outstanding by 30% in August 2023. 

To control this, the RBI has decided to increase risk weights for banks and Non-Banking Financial Companies (NBFCs). This means that banks and NBFCs will need to set aside more capital for each loan they provide. In simpler terms, this ensures that banks won’t face undue distress if a borrower fails to repay the loan.

RBI’s Action on Unsecured Loans

Personal and credit card loans are considered unsecured, meaning they carry the highest risk. These loans do not have collateral, making them prone to a higher risk of default. Therefore, the RBI has instructed banks and NBFCs to maintain an extra buffer for providing unsecured loans. This move aims to prevent banks from facing liquidity issues and money depreciation by distributing loans too liberally.

Concerns for Consumer Durables Companies

Due to the increased risk weights, banks may require more capital, leading to higher costs. Often, banks pass on the burden of increased costs to consumers. Consequently, there are concerns that interest rates on personal loans may rise.

In this festive season, consumer durables companies have offered long-term loans, zero down payments, and zero-interest loans for their products. This made products more affordable for consumers. However, due to RBI’s strict measures on unsecured loans, consumer durables companies and retail sellers fear their businesses might be affected. The increased cost of easy finances for consumer goods could impact companies’ profits and margins.

According to Kamal Nandi, Business Head and Executive Vice President of Godrej Appliances, as mentioned in Business Standard, approximately 40% of industry sales contribute through financing. Any step to increase interest rates can affect the industry, and the impact will depend on the extent of the interest rate hike.

Will Personal Loans Become Expensive?

Interest rates are already high, but due to the RBI’s strict measures, an additional increase is anticipated. However, according to Shibani Kurian, Senior Executive Vice-President & Head Equity Research, Kotak Mutual Fund, interest rates will not rise immediately. 

Kurian further adds that most major banks and NBFCs are currently well-capitalised and have excess capital than required under regulatory requirements. Since banks don’t need to raise capital immediately due to high-risk weights, consumers may not feel the burden of increased costs for the time being.

What’s Next?

After the RBI’s decision, the banking industry may require an extra capital infusion of around Rs 84,000 crores. Experts believe that this could lead to an increase in borrowing costs for consumers.

In conclusion, consumer durables companies and sellers eagerly await to see if consumers will bear the brunt of the RBI’s decision. 

*The article is for information purposes only. This is not an investment advice. 

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