Reserve Bank of India's lens on rising unsecured loans in banking system

The Reserve Bank of India (RBI) advised banks on Friday to exercise caution with unsecured loans, which have grown significantly faster than the overall credit in the banking system.

“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,” said RBI Governor Shaktikanta Das while announcing the review of the monetary policy.

“Banks and NBFCs (non-banking financial companies) 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,” said Das.

Deputy RBI Governor Swaminathan J further explained that unsecured retail credit saw an “outlier” growth of 23 per cent in the past two years, compared to an overall credit growth of 12-14 per cent. He said no action in terms of an increase in risk weight is considered at this point in time and wants banks to act as the first line of defence.

“We have not announced any regulatory or macro-prudential measures at this time. We would expect banks, NBFCs, and fintechs to act as a first line of defence,” said Swaminathan.

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According to RBI’s latest Financial Stability Report, advances for unsecured retail loans rose to 25.2 per cent in March 2023 from 22.9 per cent in March 2021. In contrast, secured loans saw a decline to 74.8 per cent from 77.1 per cent during the same period.

“Improved underwriting capabilities of lenders due to better availability of information and leveraging technology has been the primary driver of growth for unsecured loans at banks and NBFCs,” said Aniket Dani, director research, CRISIL Market Intelligence and Analytics.

Further, the ease of doing business through the digital medium has made lending easier. Therefore, Dani expects banks, NBFCs and fintechs to take appropriate internal controls with the regulator taking action only if it “doesn’t see any internal controls”.

According to analysts, the RBI has turned cautious as the banking segment is witnessing an improvement in their asset quality moving away from their decade-high non-performing assets (NPA).

“Lending activity has been robust despite the high interest rates, and if and when rates fall, there could be another acceleration in borrowing. We’re also coming out of a decade of high NPAs and the central bank’s intent is for lenders to have high underwriting standards and be alert to signs of stress,” said Adhil Shetty, chief executive officer of Bankbazaar.