Be careful about retail, unsecured loans, RBI tells banks and NBFCs

The Reserve Bank of India (RBI) recently wrote to all banks and NBFCs to be careful about retail, especially unsecured, loans. Is the regulator worried about banks and NBFCs? Is there a sharp rise in some kinds of unsecured loans like personal loans, and credit cards? Are there more defaults in the personal loans category?

The Credit Information Bureau (India) Limited (CIBIL) released a report which shows that for the quarter that ended December 2022, home loans — a secured product — dipped, but personal loans and credit cards, which are largely unsecured, rose the sharpest.

CIBIL’s press release also points out that NBFCs showed the sharpest rise in personal loans compared to pre-COVID levels, but it was not much of a rise compared to PSU and public sector banks.

Coming to the troubling table from the CIBIL release, collection efficiency for personal loans and credit cards has fallen from the December quarter to the year-ago quarter. Also, looking at delinquency — by delinquency, CIBIL means borrowers who delay their interest payment by more than 30 days within the first six months of getting a loan — that category has risen for personal loans compared to pre-COVID levels.

In an interview with CNBC-TV18, Rajesh Kumar, MD and CEO of CIBIL, who has put together the data, said that now when RBI talks about a bit of caution in unsecured loans, it’s timely advice and prudent because this growth story has to continue.

“The only way it (growth story) can continue is to ensure that there is responsible lending all around because whenever there is a lot of growth in retail lending, there are bound to be small pockets where you will find a bit of an issue with volume and velocity and that is happening in a small portion of unsecured loans below Rs 50,000,” Kumar added.

Meanwhile, Shanti Ekambaram, Whole Time Director at Kotak Mahindra Bank, said, “Collection mechanisms must be in place and keep pace with the disbursement that is happening. This is a largely personal loan, but there is a commercial end of the loan, business loan, which is increasing, which so far has not been disclosed.”

Karthik Srinivasan, Senior VP and Co Group Head-Financial Sector Ratings, ICRA, said, “The quantum of data that is available today and our interactions with banks and NBFCs, there is a preference for better rated or borrowers with higher credit scores. So, to that extent, the cherry-picking of the portfolio is happening.”