Unsecured loan growth high, RBI unlikely to put restrictions: India Ratings

Unsecured loans are on the rise, but the Reserve Bank is unlikely to put regulations to curb the same, a top official of India Ratings and Research said on Wednesday.

The domestic credit rating agency, a part of the Fitch Group, feels there are no issues on asset quality as a result of the fast-paced growth in the portfolios as yet, its head for financial institutions Karan Gupta told reporters here.

Gupta said most of the unsecured lending by banks is to salaried individuals, especially ones with whom banks already have a long relationship, giving them a look into cash flows while making the lending calls, he said, adding events like major job losses can hurt the asset quality.

It can be noted that banks have been reporting very high growth in the retail unsecured books for the last few months, leading to concerns over its possible impact on asset quality. RBI's financial stability report also flagged the risk, pointing out that the credit card NPAs for state-run lenders is over 16 per cent.

There have been reports of the central bank mulling moves like upping the risk weights associated with such products, like credit cards, personal loans etc.

When asked about reports of RBI mulling an increase in risk weights, Gupta said the worry surrounding the segment is not so high which may result in such a move.

In its mid-year review of the banking sector outlook, India Ratings said banks, especially the private sector ones, are focusing on unsecured lending products to protect their margins, which have come under pressure.

Gupta said the net interest margins are set to compress by 0.15-0.20 per cent to 3.41 per cent for the banking system as a result of the struggle for deposits, which will increase the rates offered to depositors.

The current spike in deposit growth to over 13 per cent due to the withdrawal of the Rs 2,000 notes that has got additional funds of over Rs 3.5 lakh crore to the system, the agency said, adding that the growth may be transitory.

The agency upwardly revised its FY24 deposit growth estimate to over 12 per cent, and maintained the view that credit growth will come at 13.5 per cent.

The NPAs will reduce further to 3.2 per cent at the end of the fiscal for the banking system, it said.

The private capital expenditure is at the cusp of revival, and companies can start to invest in the next six months, the agency said.

The non-bank lenders' loan growth will slow down to 15-16 per cent in FY24, as against 20 per cent, the agency said, adding that such lenders will experience an uptick in NPAs and also credit costs.

The microlending segment's growth has been retained at 20-30 per cent, but the agency said that there is a higher likelihood for it to come at the lower end of the expectation due to aspects such as upcoming general elections and over-leverage among borrowers, the agency said.