Prudence in personal finance means giving priority to tomorrow’s freedom over today’s impulse. Many pundits will always urge you to delay gratification, and elders in the family have always advised you not to borrow or overspend. That advice matters even more now, given rising borrowing costs.
The Reserve Bank of India recently intervened to curb the rise in unsecured consumer loans. Its job is to maintain financial stability, and with credit card borrowing for spending rising sharply and topping Rs 2,00,000 crore in July 2026, it is trying to be prudent. It has made unsecured loans more expensive by asking lenders to put aside more equity capital. That means if a bank or a non-banking finance company was putting aside Rs 100 for every Rs 100 lent through unsecured loans, the lender now has to put aside Rs 125 for every Rs 100 lent. Lenders can set aside that money as equity or debt. Most lenders avoid equity as it is the most expensive form of capital. However, they need to preserve their return on capital. The only way to meet these requirements is to pass the higher lending cost on to us.
The RBI wants to bring down revolving credit facilities that charge 3% to 4% interest per month. When you pay only the ‘minimum amount due’ on your credit card, you are using the revolving credit facility that attracts a significantly higher interest rate. At the same time, when you convert your major charges on credit cards into equated monthly instalments, banks love it. They want you to take expensive loans and pay them more interest. That helps them grow. The convenience of digital lending through smartphone applications makes it an attractive proposition for instant spending. The RBI wants you to slow down that spending hunger and curb expensive borrowing.
Banks know about your spending and repayment habits. Your credit score makes you a good or a bad borrower. However, the RBI is clamping down on loans that pose a systemic risk, not on ordinary borrowing habits. It is making unsecured loans, including high-interest revolving credit, more expensive for banks to offer.
Going forward, personal loans will be 0.25%-0.75% more expensive across all banks and non-banking finance companies, so you may see reduced pre-approved personal loan limits.
Financing charges for credit card outstanding balances will rise to 48%-52% per annum from 42%-45%. As a result, expect lower credit limits, a higher threshold for limit enhancement and restrictions on EMI conversions of large expenses.
Interest rates on loans from NBFCs will be more expensive than bank loans, as banks must hold more capital against NBFC lending. That adds a burden for borrowers, so small-ticket loans get expensive, and rejection rates rise.
What does it mean to you?
Your liabilities need to be rationalised. You need to reduce outstanding credit card balances and expensive personal loans. Your credit card balance is now your new emergency, so convert the high-cost outstanding balance into a short-term, fixed-tenure loan or opt for a balance transfer. Your credit utilisation should be less than 30% of your limit, and you should not apply for too many new loans simultaneously. In this situation, you may want to protect your credit score.
Since the COVID-19 pandemic, household financial liabilities have risen to 6% of India’s gross domestic product (GDP), up from around 4% before the pandemic. As a result, net household financial savings have fallen substantially. That limits the money available for investing for long-term financial goals like retirement and children’s education.
The latest RBI data shows money moving from bank savings and physical assets to financial assets like equity. This trend needs to continue, as India needs capital market inflows from domestic and foreign investors. If household liabilities surge, they may not have enough money to invest. So India’s economy needs households to be prudent enough to think long-term.