Industry
Mint Explainer: Why RBI wants to keep a check on growing personal loan segment
Summary
- As of August, the outstanding in the personal loan category was at ₹47.70 trillion, making up 37.7% of the incremental bank credit for the first half of the fiscal year.
The Reserve Bank of India (RBI) has expressed caution over the rapid growth in certain personal loan segments, saying that it is closely monitoring the situation for early signs of distress. RBI governor Shaktikanta Das has called on banks and non-banking finance companies (NBFCs) to bolster their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards in their own interest.
Mint breaks down the development.
What do personal loans constitute?
Personal loans, extended to individuals, encompass consumer credit, education loans, housing loans, and loans for investment in assets such as shares and debentures. As of August, the outstanding in the personal loan category was at ₹47.70 trillion, making up 37.7% of the incremental bank credit for the first half of the fiscal year.
Why is the RBI concerned?
The central bank has pointed to the nearly 30% year-on-year (YoY) growth in retail credit observed in recent years for many banks and NBFCs. The average unsecured retail growth stood at 23%. This outpaces the general credit growth rate, which is between 12% and 14%. Though the overall asset quality in the personal loan sector has improved, credit card receivables' impairments have seen a slight increase.
The June Financial Stability Report by RBI indicated a minor dip in gross non-performing assets (NPAs) in personal loans to 1.4% by March 2023 from 1.9% in September 2022. Conversely, GNPA for credit card receivables increased to 2% from 1.9% over the same period. Goldman Sachs, in a note in June, had flagged a rise in repayment delays of over 30 days and a growing share of subprime customers in small-ticket personal loans.
RBI's regulatory action
During the October monetary policy press conference, the RBI had clarified it wasn't planning regulatory actions, such as risk weight or provisioning adjustments, to check personal loan growth. It emphasized the advisory nature of its statement and urged banks and NBFCs to adopt stringent internal prudential standards. Current norms assign risk weights of 100% and 125% to unsecured segments like consumer loans and credit card receivables, respectively.
What are bankers saying?
Several bankers, on conditions of anonymity, told Mint that they primarily extend personal loans to salaried individuals, backed by consistent cash flows. They expressed confidence in the personal loan segment's stability and attributed the rise in loan demands to heightened consumption needs.
An August report from India Ratings highlighted NBFCs' increasing shift to collateral-free loans in pursuit of higher yields. Data from 12 prominent NBFCs revealed unsecured loans' share jumped to 30% in FY23, up from 26% in FY22 and 23% in FY21.
