Looking at the increasing demand for consumer loans, last month in August, the Reserve Bank of India reduced the risk weight on the loans, thereby making these loans cheaper. With this move, consumer durable loans such as credit card, personal loan, auto loan and others are all set to become affordable. Read below to understand how personal loans will become cheaper with RBI’s latest move of reducing the risk weight.
What is risk weight?
In simple terms, risk weight is nothing but the capital that has to be set aside as specified by RBI when sanctioning a loan amount. This amount is depicted in percentage and has to be set aside to take care of any default. The function of risk weight helps in assessing the risk perception that the apex bank carries when giving out loans for different sectors. However, the amount that has to be set aside by the banks depends on the risk profile of the borrower. Riskier the borrower, higher the capital that has to be set aside. Based on the possible defaults for each category, different risk weights are assigned for different types of loans.
The risk weight function is an important part of the standardised credit risk management set by the RBI and has to be followed when issuing all forms of consumer credit including personal loans, credit cards and others. Hence, a reduction in the risk weight helps banks to utilize free capital and lend more credit to other loan seekers.
The existing risk weight for an unsecured loan is high and stands at 125 percent. However, with the latest move of the RBI to reduce the risk weight to 100% is only limited to personal loans and the credit card receivables still stand at 125%. The reduction of risk weight on personal loans will help banks free up the capital and increase their loan offerings in the coming months.
Impact of risk weight on personal loan
The interest rate on personal loans is charged based on the risk profile and credit score of the borrower. For instance, banks charge an interest of anywhere between 12%-30% on personal loans. While the decrease in the risk weight does allow banks to offer loans at a lower rate of interest, but the reduction in the interest rate happens only on the basis of the customer’s risk profile. Banks are likely to charge a high-interest rate to individuals having a poor credit score and too many existing loans. Therefore, it is significant that you don’t take too much credit and increase your credit score by repaying EMIs on time, checking your credit report, paying the full outstanding amount on credit card and others. Defaulting on loan payments does lower your credit score, thereby preventing the banks to offer you a loan at low credit. RBI’s latest move does not ease the risk weight on credit card and it still stands at 125%.
Conclusion Personal loans are unsecured loans that are offered to borrowers without any collateral and therefore banks have to be extremely cautious at the time of lending them. The interest rate varies from bank to bank depending on your risk profile, credit score, occupation, source of income and other factors. However, with the RBI’s latest moves, the rate of interest on a personal loan is also likely to see a fall. To get a loan at best interest rate you can apply for a personal loan online in India. With technological advancement, there are many online lenders in India offering loans at an interest rate starting from 10%. Applying for a personal loan online is easy and hassle-free as online lenders allow you to submit details as well as documents online. Online lenders utilize their data systems and algorithms that help them determine your personal loan eligibility and update the status of your loan instantly. Unlike traditional banking institutions, online lenders offer you instant approval and disbursal that makes it easy for you to cater to your financial emergencies in the nick of time. However, it is important to know that even online lenders check on your credit score when processing your loan application and offering you the loan amount. The interest rate offered is also determined on the basis of your credit score. Therefore, when applying for a loan having a good credit score is essential. Before making a loan application, you can check your personal loan eligibility online using a personal loan eligibility calculator that helps you get an estimate of the loan amount you are eligible to get. The calculator is simple to use and requires you to fulfil your basic details such as PAN card number, name, company name and other details. Also, when getting a personal loan, you must opt for a loan amount that fits your monthly budget for EMI repayment.