A prudential approach to risk management must not hold back credit availability

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₹50,000). Unsecured personal loans, however, are not necessarily unproductive. Consider consumer durable loans.

Most improve the quality of life of loan-bearers and potentially increase the earning capacity of relatively low-income households that do not have sufficient savings to buy such products with upfront lump sums. For example, smartphones have enabled gig workers to earn respectable livelihoods. The accessibility of easy financing options (no-cost EMIs and other buy-now-pay-later schemes) has made smartphones and other consumer durables more attainable for low-income households.

If RBI’s directive reduces the availability of such loans to these households, it may hinder India’s overall economic demand and recovery. It’s important to note that an increase in lending rates, a likely consequence of elevated risk weights, may not deter wilful defaulters who are typically undeterred by higher interest charges. However, genuine demand for and the availability of small-ticket consumer loans, crucial for the well-being of lower-income groups, might be adversely affected.

Lenders therefore need to be cognizant of the intent behind RBI’s directive. Retails loans are just a call or tap away nowadays and disbursal is almost instant. Hardly any of us has escaped recurrent phone calls offering personal loans and “lifetime free" credit cards.

Technology has sharply brought down the delivery cost of small-ticket loans. This has helped formal lenders reach nearly every pin code in the country. PayTM recently said that as of 30 November, over 70% of its unsecured loans were under ₹50,000.