Small borrowers stay clear of sanctioned loans as rates rise

livemint.com:

MUMBAI : Small borrowers or those with loans of up to ₹2 lakh have started to utilise less of their sanctioned credit limits after December as interest rates rose, indicating a reluctance to take on additional debt. Calculations based on recent data released by the Reserve Bank of India (RBI) showed that from a utilisation of 67.3% in December, and 66.9% in March, it stood at 65.5% in June, even as their total credit limit grew in the same period. RBI defines ‘small borrowal account’ as one with a credit limit of up to ₹2 lakh, with holders of these accounts being individuals or entities with relatively small credit requirements.

Their sanctioned loans have outpaced outstanding loans in the June quarter on a year-on-year (y-o-y) basis. While sanctioned loans of up to ₹2 lakh grew 14%, outstanding loans grew a tad slower at 11.5%, the data showed. Experts said these are typically micro businesses who are more prone to getting impacted by changes in interest rates.

Between May last year and this February, RBI has increased the repo rate – used as a benchmark to price loans to retail and small business borrowers — by 250 basis points (bps) to 6.5%, before pausing in April. According to an economist at a bank, small borrowers are under the external benchmark regime and therefore any changes in the repo rate are passed on to them, impacting their finance cost. “Credit card limits could also be included in this and indicates that while banks have increased limits, borrowers have not used a lot of it," said the economist cited above.