Retail loans likely to become a source of systemic risk, warns RBI

Retail loans, long considered a panacea for the banking system, may become a systemic risk, the Reserve Bank said on Tuesday.

The central bank, however, was quick to add that it is well-equipped with its policy toolkit to handle any systemic risk that may arise.

"Empirical evidence suggests that a build-up of concentration in retail loans may become a source of systemic risk," the RBI said in its trends and progress in banking report for FY22.

It can be noted that in the recent past, banks which faced huge loan reverses on the large exposure front had switched focus towards the retail assets building front to avoid any major reverses in asset quality as done after the asset quality review.

According to experts, the granularity of loans, coupled with the clearer sight of end use and better diligence and monitoring, given the progress on the credit information companies front, made retail a safer bet for banks all this while.

The report said in recent years, Indian banks appear to have displayed a "herding behaviour" in "diverting" from the industrial sector towards retail loans, and the decline was evident across all groups of banks, including state-owned, private and foreign.

The report explained that 'systemic as a herd' refers to a phenomenon when institutions which are not individually systemically important behave in a way similar to the market leaders and, as a result, get exposed to common risks.

"This could amplify systemic risk through higher co-movement of performance of banks, even though individually they may focus on reducing their standalone bank risk through portfolio diversification," it added.

After an analysis of the Indian scenario as per globally accepted models, it said there is no difference between the risk posed by state-owned lenders and private-sector lenders.