RBI's Stealth Hike: Borrowing Gets Costlier Without Rate Twists - Hemank Purohit
Some refreshers:
Banks are the bridge between people who have excess money
and people who are need of one. A bank typically takes deposits from customers
and lends them to the borrowers.
But a bank can’t just play around with other people’s money.
It has to have some skin in the game to be trusted, right?
So, as mandated by RBI, each bank has to set aside some
percentage of its own money or capital for each penny they lend. This is to
make sure there remains an ownership and it’s not just depositors’ hard-earned
rupees that’s at stake. And here comes the concept of “Capital Adequacy Ratio”
CAR as bankers normally say.
Let’s say that percentage is 10, which means for ₹100 bank
lends they need to have atleast a ₹10 capital coverage. Now here is where it
gets interesting, each loan has a different risk factor. For instance, if the
bank gives out a home loan, it can always repossess the home if there’s a
default. There is a collateral involved. But so is not the case with personal
loans, right? Hence there is different risk-weightage for each loan category.
Read this for clarity:
₹100 worth of home loans, we’ll assign a risk weight of 50%
because of existence of a collateral. That means we consider only ₹50 worth of
this loan to be risk prone. So, bank only needs to set aside ₹5 worth of your
own capital (10% of ₹50). But for personal loans, the risk weight is 100%. So
if you lend ₹100, you need to keep ₹10 worth of capital.
When RBI jumps into the picture:
In mid of November, RBI through its circular had twisted the risk weightage of each class of loans. Unsecured personal loans will have a risk weight of 125% instead of 100%. And for credit cards, the risk weight will now be 150% (as compare to 100% previously).
1. This
means that the banks have to set aside additional capital because these types
of loans are considered even riskier now. The bank doesn’t earn anything from
it. So, to make up for this, they might end up charging a higher interest rate
on new personal loans.
2. Not just
banks, but non-banking financial companies (NBFCs) and their fintech partners
(like Paytm) will be found in a similar situation. This is because these
entities will be hit by a two side punch — both on the assets and liabilities
side.
And once the NBFCs factor in the impact of paying banks a higher interest rate and then setting aside their own capital before disbursing loans, they’ll end up charging the final borrower a much higher interest rate.
So yeah, that’s the bottom line. The RBI’s new move makes borrowing more expensive on people’s pocket. It is hoping that if people have to pay out higher interest, it will slow down the demand for loans too.
And that’s how the RBI has hiked interest rates without even
hiking interest rates.
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