Personal loans in India—once the easiest and fastest form of unsecured credit—are now becoming more expensive. Several banks and NBFCs have increased their risk-based pricing, meaning borrowers with lower credit scores or unstable income profiles will now face higher interest rates, stricter eligibility checks, and tighter lending norms.
The trend comes at a time when consumer demand for personal loans is rising, but so are early delinquencies and household debt pressure.
Here’s why banks are tightening the screws this quarter and what it means for borrowers.
1. Rising Default Risk in Unsecured Loans
Banks are reporting a noticeable rise in:
Missed EMIs
Credit card rollovers
Personal loan early delinquencies (0–30 DPD)
BNPL repayment stress
Unsecured loans come with no collateral, so banks respond by:
✔ Increasing interest rates for high-risk borrowers
✔ Tightening underwriting
✔ Reducing pre-approved limit offers
Borrowers with low or borderline credit scores (650–720) are seeing the highest impact.
2. RBI’s Warning on Unsecured Credit Growth
The Reserve Bank of India recently cautioned lenders about the fast expansion of unsecured retail loans.
RBI’s concerns include:
Overleveraging of urban millennials
Excessive fintech-led small-ticket lending
Rising household debt-to-income ratios
Aggressive promotional lending by NBFCs
Banks are now being more conservative, adjusting their pricing models to reflect higher risk.
3. Income Volatility Among New Borrowers
Many applications today come from:
Gig workers
Freelancers
Delivery agents
Contract employees
Tier-2/3 borrowers with fluctuating income
Since income stability is uncertain, banks add a higher risk premium to personal loan interest rates.
This pushes risk-based pricing higher for borrowers not in traditional salaried profiles.
4. Competition From Fintechs Is Forcing Banks To Price Smarter
Fintech apps offer:
Instant loans
Flexible ticket sizes
Ultra-fast approval
But banks operate under stricter regulations and have higher risk controls.
To compete without compromising asset quality, banks now:
Use advanced risk scoring models
Adjust rates for each borrower profile
Charge more for uncertainty or thin-file customers
This dynamic pricing is designed to protect margins.
5. Household Debt Is Rising Faster Than Income
India’s middle class is currently experiencing:
Higher EMI burden
Inflation-driven expenses
Lower savings
Higher dependence on unsecured loans
Banks view this as a red flag, indicating higher future defaults.
Risk premiums are being increased to compensate.
6. Increased Cost of Funds for Banks
Due to macroeconomic conditions, banks’ borrowing costs have risen:
Higher repo-linked lending rates
Deposit rate competition
Global economic headwinds
To maintain profitability, banks pass on part of the cost through:
✔ Higher personal loan interest rates
✔ Additional risk charges
Unsecured loans get impacted first because they’re costlier to manage.
7. Higher Credit Utilisation Among Borrowers
Many customers’ credit card utilisation is above 40–60%, which banks consider high-risk behaviour.
This results in:
Lower credit scores
Higher perceived default probability
Higher risk-based pricing
Even borrowers with good incomes face higher rates if utilisation is high.
What Borrowers Should Do Now
✔ Improve credit score (aim for 750+)
Pay dues on time, reduce utilisation, and avoid multiple loan applications.
✔ Compare personal loan rates across lenders
Rates vary widely with risk-based pricing.
✔ Avoid taking loans for discretionary purchases
Focus on essential needs only.
✔ Reduce credit card balances
This instantly improves credit score and lowers risk category.
✔ Maintain stable income documentation
Especially if self-employed or gig-based.
✔ Take top-up loans instead of new unsecured loans
If you already have a home loan, top-ups are cheaper.
Conclusion: Personal Loans Are Still Useful — But Borrowers Must Be Smarter
Banks aren’t stopping personal loan lending — they’re simply pricing risk more accurately.
For borrowers, this means:
Higher rates for unstable profiles
Better offers for those with strong financial discipline
The need to plan borrowing carefully
With the right credit behaviour, borrowers can still access affordable loans despite the rising risk premiums.
FAQs
1. What is risk-based pricing in personal loans?
It means banks charge different interest rates depending on a borrower’s credit risk.
2. Why are personal loan rates rising now?
Due to rising defaults, RBI warnings, income volatility, and higher cost of funds.
3. Who will be most affected?
Borrowers with low credit scores, high utilisation, or unstable income.
4. How can I get a lower personal loan rate?
Improve credit score, reduce credit usage, and compare lenders before applying.
5. Are personal loans still safe to take?
Yes, if taken responsibly and for essential needs with a stable repayment plan.
Published on : 22nd November
Published by : SMITA
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