Retail credit flows surge not resulted in stress build up: RBI report

The Indian economy was witnessing a surge in retail credit growth. The credit growth is led by a well-diversified customer base, with reasonably good financial health conditions

The recent surge in credit flows has not resulted in stress build-up in the retail credit segment, although a few sub-segments in the unsecured space show signs of weakness. This warrants close monitoring by financial service providers, and the recent pre-emptive macro-prudential measures by the Reserve Bank augur well for financial stability, according to a report by RBI staffers.

The Indian economy has been witnessing a surge in retail credit growth, led by a well-diversified customer base with reasonably good financial health conditions.

According to the study “Dynamics of Credit Growth in the Retail Segment: Risk and Stability Concerns”, the majority of retail credit products recorded a statistically significant rise in credit growth in the post-Covid-19 period compared to the pre-Covid-19 period. Contrary to the credit growth, stress levels, as depicted by Gross Non-Performing Asset (NPA) ratios and slippage ratios, in retail portfolios dipped during the post-Covid-19 period.

However, credit card and vehicle loan portfolios did record a moderate but statistically significant rise in stress. In this context, it is imperative for banks and other financial service providers to monitor the retail segment closely and continuously for any undue build-up of stress, as pointed out by a study that appeared in RBI’s bulletin for January 2024.

The study suggests that policymakers may also consider using structural prudential tools, viz., debt-service ratio and debt-to-income ratio of retail borrowers. The macro-prudential tools impart lender resilience by specifying differential risk weights for various classes of retail products, reflecting their inherent riskiness.

Furthermore, policymakers are encouraging lenders to utilise the emerging technology ecosystem, like account aggregators, to seek requisite consent from borrowers, strengthen credit underwriting, and improve monitoring models.