The personal loan sector in India has grown immensely over the last 10 years fueled by digital lending platforms, consumer culture, and credit accessibility. Growing concerns over unsecured lending, overleveraging and delinquency risk, especially for younger, first-time borrowers were also part of this growth. The Reserve Bank of India (RBI) has now introduced guidelines in 2024-25 to promote risk management practices and introduce transparency and prudence into the personal loan approval process. The regulatory changes have now begun to transform how banks, NBFCs and fintech companies will assess and approve personal loans.
Key RBI Guidelines Effecting Personal Loan Approvals
1. Loan-to-Income (LTI) Ratio Cap
- What is New?
- RBI introduced analysts lending and promoted the cap on Loan-to Income ratios at 50% for unsecured personal loans.
- It is to be ensured that Personal loan customers Total EMIs (Equivalent Monthly Instalments) do not exceed 50% of their net monthly income.
- Impact:
- Borrowers with large existing EMIs or low income will face stricter assessment.
- Loans encourage financial discipline and promote borrower overleveraging.
2. Risk-Based Capital Requirements Heightened
- What’s Changed:
- RBI has increased the risk weights on unsecured personal loans from 100% to 125% or higher depending on the lender’s internal credit assessment methodology.
- Impact:
- Banks and NBFCs will now have to allocate more capital for every unsecured loan disbursed.
- This will also inflict additional costs for lenders which will result in stricter lending approvals, especially to low credit score applicants.
3. Strict KYC and Income Verification
- What’s Changed:
- KYC norms have been heightened and digital footprints must now be verified.
- Lenders must authenticate bank statements, ITR’s and employment status more thoroughly for all applicants applying for loans.
- Impact:
- Personal loans will no longer be granted on the spot with little or no documentation.
- Borrowers may experience delays or require more documentation especially for gig and self-employed workers.
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4. Credit Bureau Reporting and Monitoring
- What’s Changed:
- RBI has mandated loans and repayment behavior must be reported in real time with credit bureaus.
- Multiple loan requests within a short interval will now clearly evoke red flags, either with lenders or platform lending.
- Impact:
- Hard inquiries and simultaneous loan applications negatively affect credit scores.
- Consequently, borrowers must be more careful when applying for multiple loans or credit cards.
5. Cooling-Off Timeframe Between Loan Applications
- What’s New:
- Lenders must have a cooling-off period of 30 days, before the lender can assess again, a loan application that has been rejected.
- Impact:
- This prevents loan stacking situations, therefore decreasing borrower liability.
- Access to a reasonable waiting period, encourages borrowers to review their current financial situation before applying again.
6. Regulating Digital Lending Platforms
- What’s New:
- Now the RBI requires regulated entities (REs) are culpable for loans from a third-party digital app.
- The disbursement must be into the borrower’s bank account, not through fintech wallets.
- Impact:
- The process creates another level of accountability mitigating the risk for fraud and/or the risk of data misuse without authorization.
- It brings transparency to the BNPL (Buy Now, Pay Later) and micro loan industry.
How this will affect borrowers in 2025
- Borrowers with bad credit scores
- More difficult to get approved.
- Effective interest rates may be drastically higher due to higher risk weightings.
- Additional documentation may be required or co-signers may be required.
- Salaried borrower’s vs self-employed
- Salaried workers with steady income will have smoother approvals.
- Self-employed borrowers and gig workers are likely to have more scrutiny in their applications or have to provide longer spans of income history.
- Young borrowers (Millennials & Gen Z)
- Borrowers aged 21-30 years with short credit histories, will find it may be difficult to get approved without a co-applicant.
- Buy Now Pay Later (BNPL) and easy EMI products are now receiving more scrutiny which impacts insouciant borrowing of the past.
What lenders are doing differently
- Tier-1 banks are tougher at the eligibility process and hiking minimum income thresholds.
- NBFCs are pivoting to the focus on secured or semi-secured loans.
- FinTech’s are developing their own AI-based credit scoring mechanisms with conformity in mind with new RBI norms.
Loan Applicants in New Regime – Tips
- Have a Good Credit Score (750+): Pay EMIs and credit card dues on time
- Have a Good Debt to Income Ratio < 40% – Don’t over-borrow. If in doubt, consolidate your debts to be sure.
- Don’t Make Multiple Applications: Spread out your inquiries to protect your credit profile.
- Give Accurate and Complete Documentation: Transparency will improve your chance of approval.
- Compare Between Lenders: Under the new guidelines you may find the interest rates and approval criteria can differ markedly from lender to lender.
Conclusion
The initiative taken by the RBI to introduce these new regulations should be applauded given the climate of increasing risk in India’s personal lending ecosystem. While there will be collateral inconvenience from the checks and balances, the RBI is protecting lending and seeking to encourage more responsible borrowing to facilitate a less risky lending environment. For borrowers? These measures mean that there will be higher scrutiny, however there are greater protections available and the manner of lending will be fairer. In 2025, the personal loan landscape will be dramatically different under increased regulations and responsibilities for lenders. Until then, not allowing the current climate of loans inhibits your ability to adapt and remain informed financially disciplined is the best course of action when it comes to having your personal loan application approved.
Written by Pranjal Data
