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Unsecured Loans Spike Triggers RBI Caution to Banks
RBI raises concerns over surging unsecured loans as they outpace overall credit growth. Experts warn of potential risks to the banking sector and the consequences of consumerism trends.
Author: Saurav Kumar
Published: October 10, 2023
In a major development, the soaring numbers of unsecured personal loans are causing a stir within the banking sector. The Reserve Bank of India (RBI) via monetary policy review issued a cautious note to banks, urging them to exercise restraint with unsecured loans, which have outpaced the overall credit growth in the banking system.
RBI Governor Shaktikant Das emphasised, “Certain components of personal loans are recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress.
Understanding Unsecured Loans: A Risky Proposition
Unsecured loans are financial lifelines offered by banks without the requirement of collateral. This implies that if borrowers default, banks lack a means of recourse to recover the money, rendering such loans riskier than those backed by collateral.
As per the latest available data for June 2023, the financial indicators of non-banking financial companies (NBFCs) mirror those of the banking system.
The monetary policy review underlines, “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. The need of the hour is robust risk management and stronger underwriting standards.”
Unprecedented Loan Surge: An Impending Risk?
According to Business Standards, the total value of unsecured loans surged from Rs. 7 trillion in 2019 to Rs. 14.3 trillion in 2023, reflecting a staggering increase of more than Rs. 7 trillion.
While unsecured loans and credit cards have driven robust growth in India's banking sector, experts simultaneously anticipate the accompanying risks.
According to RBI data, unsecured personal loans registered a 24% Year-on-Year growth as of April 21, 2023, compared to 18.2% Year-on-Year growth as of April 22, 2022. Credit card outstanding also experienced a substantial increase, rising from 20.1% in April 2022 to 29.7% in April 21, 2023.
Experts' Concerns and RBI's Vigilance
Banking experts express their apprehension about this trend and welcome the RBI's directives. Sanil Babu, Kerala Secretary of the Bank Employees Federation of India (BEFI), cautioned, “If an unsecured personal loan goes bad, the bank faces a straight loss of 100%, contributing to Non-Performing Assets.”
He further explained, “Unsecured loans are a double-edged sword of consumerism, posing a potential threat to both the banking sector and borrowers who might fall prey to non-banking lenders. Moreover, the dip in household financial savings underscores people's overreliance on unsecured loans.”
A few weeks ago, RBI data revealed a substantial decrease in household financial savings.
Deputy RBI Governor Swaminathan J highlighted that unsecured retail credit had witnessed "outlier" growth of 23% in the past two years, compared to an overall credit growth of 12-14%. He urged Banks, NBFCs, and fintechs to act as the first line of defence, indicating the need for vigilance in this lending landscape.