RBI to introduce More Strict Rules for Personal Loans
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The Reserve Bank of India (RBI) is getting ready to introduce tougher rules for unsecured personal loans. This is because RBI is concerned about the fast growth of these loans and the risks they might bring to banks and borrowers.
Earlier also, RBI has raised a lot of questions over unsecured personal loans. Moreover, now there a lot of apps that offer unsecured personal loans easily and digitally. This has led to a high rise in personal loans. But RBI intervened and asked Banks to lend cautiously.
Banks’ personal loan growth more than halved to 8.4% year-on-year in February from 19.5% a year ago, excluding the HDFC Bank merger impact, while growth in outstanding credit card debt dropped to 11.2% from 31%, the data showed.
Why is RBI Concerned About Unsecured Personal Loans?
Unsecured personal loans are loans given without any collateral, such as a house or car, which makes them riskier for banks. Because these loans don’t have any asset backing them, banks rely heavily on the borrower’s creditworthiness. RBI fears that if borrowers take too many unsecured loans or loans that they cannot repay, it could create financial problems for both banks and customers.
What Changes is RBI Asking Banks to Make?
Officials shared that the RBI has been quietly advising some banks to tighten their loan rules. The central bank wants banks to:
- Set stricter internal policies on who can get unsecured loans.
- Limit the loan amount based on the borrower’s credit score and past loan behavior.
- Monitor and control how many unsecured loans an individual can have at the same time.
For example, if a borrower already has two loans, like a home loan and a vehicle loan, banks should carefully check before approving a personal loan. This approach will help reduce the chances of borrowers getting overwhelmed with debt.
RBI Wants Clearer Rules and Better Monitoring
Many banks already have some limits on unsecured loans, but the RBI wants these rules to be better documented and regularly checked. This will help banks manage risks more effectively and make it easier for RBI to review their lending practices.
RBI’s Concern Over Rising Loan Defaults
The RBI is worried about the growing number of unsecured loans that might become difficult to recover. During its regular checks, the regulator noticed an increase in potential loan defaults, which could hurt the banking sector.
What Can We Expect Next?
Bankers expect that RBI will soon release a draft notification with new guidelines for unsecured personal loans. This notification might come within the next two weeks.
Background: Recent RBI Measures and Loan Growth
In November 2023, RBI increased the risk weights on consumer loans from 100% to 125%. This means banks need to hold more capital against these loans to cover possible losses, making it costlier for banks to lend unsecured personal loans.
According to RBI data, personal loans grew by 14% year-on-year in March 2025, slightly slower than the 17.6% growth recorded the previous year. Overall, non-food credit growth was 12%, compared to 16.3% a year ago. This shows that while demand for unsecured loans is still strong, growth is slowing down.
Public vs Private Banks on Unsecured Loans
Private sector banks have large unsecured personal loan portfolios and continue to see good demand. However, they are expected to become more cautious due to RBI’s concerns.
On the other hand, public sector banks have smaller unsecured loan books, mainly because they have fewer credit card customers.
Rising Write-Offs Signal Underlying Problems
RBI’s December 2024 Financial Stability Report highlighted a sharp increase in loan write-offs, especially by private banks. Write-offs happen when banks give up on recovering loans. This rise could be hiding worsening loan quality and weaker lending standards in unsecured personal loans.
