RBI flags risk to secured loans from slippages in smaller personal loans

The RBI noted that first defaults are predominantly observed in unsecured advances

The Reserve Bank of India (RBI) cautioned in its bi-annual Financial Stability Report (FSR) that borrowers with unsecured loans, such as credit cards and personal loans, who also have larger secured loans, risk triggering delinquencies in the secured loans if they default on the smaller ones. Default in any loan category results in other loans of the same borrower being treated as non-performing by the lending financial institution.

 

In addition, the RBI highlighted that the first default is mostly observed in unsecured advances. Among borrowers at risk of default, the risk of delinquency is trending high among those who, in addition to a personal loan or credit card outstanding, have availed of other retail loans.

 

“Nearly half of the borrowers availing credit card and personal loans have another live retail loan outstanding, which are often high-ticket loans (i.e., housing and/or vehicle loans),” the RBI said in the report.

 

According to the RBI, consumer credit has been the driver of credit growth in the post-pandemic period, growing at a compounded annual growth rate of 20.6 per cent compared to 14.8 per cent growth in overall credit.

 

In November last year, the RBI directed banks and non-banking financial companies (NBFCs) to set aside more capital while extending loans in the consumer credit segment to curb excessive growth. This measure slowed the pace of consumer credit growth both at an aggregate level and across product and lender types.

 

“Despite the decline in loan approval rates, the share of premium borrowers (super-prime and prime-plus) in loan originations has risen sequentially during the second quarter (Q2) of 2024-25 (FY25), suggesting that lenders are exercising caution and tightening underwriting standards,” the RBI said.

 

Moreover, the central bank highlighted in its report that while delinquency levels in consumer credit remained stable for banks and NBFCs, rising impairment was observed in the unsecured retail loan portfolios. Moreover, upgradation is declining, and slippage from Special Mention Account-2 to non-performing assets is on the rise.

 

According to data shared by the RBI, about 11 per cent of borrowers originating personal loans under ~50,000 had an overdue personal loan, and over 60 per cent of them had availed of more than three loans during FY25 so far. Additionally, nearly three-fifths of customers who availed of personal loans in Q2FY25 had more than three live loans at the time of origination.

 

Household debt

 

Meanwhile, the RBI noted in the FSR report that, at around 43 per cent as of June 2024, India’s household debt is relatively low compared to other emerging market economies. However, it has increased over the past three years. The increase in household debt is driven by a growing number of borrowers rather than an increase in average indebtedness.

 

The central bank’s analysis of borrower types highlighted that subprime borrowers availed of loans primarily for consumption purposes, whereas super-prime borrowers used debt for asset creation, especially housing.

 

Also, the per capita debt of individual borrowers has increased sharply for super-prime borrowers in the recent period, while it has remained stable for other risk tiers.

 

“From a debt-servicing capacity perspective, the rise in per capita debt only among highly rated borrowers and the use of debt for asset creation are credit-positive and enhance financial stability,” the RBI said.