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RBI asks banks to monitor personal loans

Posted Date : 08-Oct-2023 , 08:44:12 am | Posted By CASANSAAR print Print
Reserve Bank of India (RBI) is monitoring certain components of personal loans for signs of incipient stress, at a time when the unsecured retail loan portfolio of lenders has grown at a rapid pace.

“Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” RBI Das said his monetary policy statement on Friday.

Considering this surge in personal loans, Das feels that lenders must maintain robust risk management and stronger underwriting standards. While there are no explicit concerns, the surge in personal loans may heighten risks going ahead.

RBI Deputy Governor J Swaminathan added that on a year-on-year basis, retail credit growth has been 30% for most banks and unsecured credit has grown by 23% whereas other segments are growing at 12-14%. Clearly, the retail credit growth rate has been an outlier. Hence, the need to be careful.

“The RBI has been concerned about the use of the unsecured personal loans for purposes such as investments in capital markets, which have the potential to substantially increase financial stability risks,” Vivek Iyer, Partner, Financial Services – Risk, Grant Thornton Bharat said, adding that the rise of low cost or no cost brokerage firms has made access to capital markets much easier for a retail investor than ever before.

In recent months, banks and non-bank lenders have ramped up disbursements in the unsecured retail loan segment in order to increase their margins.

Currently, retail loans constitute one-third of the overall loans in the banking segment. Unsecured retail loans form 10-15% of the overall loans in the banking industry.

From a lender’s perspective, this loan segment is seen as more risky as they are not backed by collateral. To compensate for this, lenders charge a higher interest rate on these loans.

“As of now, the delinquencies do not seem to show a significant uptick across the players. Growth of loans in this segment has been very fast, and this comes with its own challenges. I think RBI is worried about this,” says Karan Gupta, Director and Head of Financial Institutions, India Ratings & Research.

ICRA Vice President and Sector Head Aashay Choksey feels that while retail loans have contributed to overall credit growth in recent years, asset quality has largely held up so far, and recoveries have been strong.

In its latest financial stability report, RBI said that the gross non-performing asset ratio of scheduled commercial banks fell to a 10-year low 3.9% as on March 31 from 11.5% in March 2018. Net non-performing asset ratio fell to 1% as on March 31 from 6.1% in March 2018.

Nevertheless, some experts feel that the delinquency ratios of non-bank lenders must be more keenly monitored these entities constantly tinker with different cohort of customers to increase the funnel of sourcing, which may not always be successful. The delinquencies of non-bank lenders may go up in such a scenario, say experts.

Both banks and non-bank lenders tend to cater to different borrower profiles. While banks tend to lend to high credit individuals, non-bank lenders cater to the under-banked segment. In recent times, non-bank lenders launched products like buy now pay, which can be risky, say experts.

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