Reserve Bank of India (RBI) governor Shaktikanta Das has cautioned about high growth in some segments of personal loans while announcing the bi-,"monthly monetary policy review on Friday (October 6). While it has not announced any steps to crimp such lending, RBI is uncomfortable with the continued rise in unsecured personal loans.
Student loans, credit cards, and other such loans where there's no need for a collateral are classified as 'unsecured'. "It is likely the RBI may raise risk weight on personal loans, according to our Banking Analyst Prakhar Agarwal. We
note retail unsecured loans grew more than 25% in FY23 and currently
form 32% of the retail loan portfolio," broking firm Elara Securities said in a note dated October 6.
Currently, unsecured personal loans carry a risk weight of 100% and the same is 125% for dues on credit cards. If the risk weight is increased, it will make such loans more expensive for the borrower too. Higher the risk, higher the interest rate on the borrower.
Personal loans have grown over 20 percent in six out of last 12 months (ending July 2023). The table below shows growth rates up to July 2023:
| Month | Growth rate (%) |
| Jul-23 | 31.70% |
| Jun-23 | 21.00% |
| May-23 | 19.40% |
| Apr-23 | 19.70% |
| Mar-23 | 20.60% |
| Feb-23 | 20.40% |
| Jan-23 | 20.40% |
| Dec-22 | 20.20% |
| Nov-22 | 19.70% |
| Oct-22 | 20.20% |
| Sep-22 | 19.60% |
| Aug-22 | 19.50% |
Das further said that smaller NBFCs have been granted permission to employ credit risk mitigation instruments, a step towards enhancing stability in their operations. Additionally, urban cooperative banks have been permitted to increase the ticket sizes of bullet gold loans, which may further stimulate economic activity.
What RBI governor said is an echo of a growing fear within India's financial industry. Banks have been keen to extend these loans to consumers because the high interest rates make for a meaty profit margin. That works well during good times but the risk of defaults is a lot higher on 'unsecured' loans.
In an earlier conversation with CNBC-TV18, Saswata Guha, Senior Director, Fitch Ratings, and Jayaram Sridharan, Managing Director, Piramal Capital and Housing Finance, have expressed similar fears.
In August 2023, AM Karthik, Vice President, ICRA, a ratings agency, estimated that when banks give out a loan of Rs 100 in unsecured loans, they tend to lose about Rs 4 to Rs 6 due to defaults and write-offs. This loss could be much higher during times of economic distress.
https://www.youtube.com/watch?v=S1fu7E5RVxo
India's shadow banks have lent at least Rs 3.5 lakh crore in the personal and unsecured loans category, according to the ICRA estimate last month. That would be about 9% of all loans made by the non-banking financial firms like Bajaj Finserv, Poonawalla Fincorp, and L&T Finance, to name a few examples.
(Edited by : Amrita)
First Published: Oct 6, 2023 11:16 AM IST
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