Don’t increase unsecured loans exposure: RBI to banks

As part of heightened caution amid growing macroeconomic uncertainty and bank failures in the US and Europe, India’s central bank is asking banks back home to be vigilant about their retail portfolios, especially unsecured loans. These include personal loans, credit cards, small business loans, and microfinance loans.

The overall share of unsecured loans as an average across private banks has increased by more than 300 basis points since June 2020, and this has not gone over well with the central bank.

“As a precautionary measure, the Reserve Bank of India has asked banks to stay within the limits seen in FY23 with respect to unsecured loans,” said a CEO of a private bank.

Credit posting

To be sure, as per the latest credit publishing data published by the Reserve Bank of India, unsecured loans lent between February 2022 to February 2023 amounted to ₹2.2-lakh crores, higher than the publication towards large corporations at ₹1.18-lakh crores.

The size of the mortgage market during this period was ₹ 2.49-lakh crore marginally larger than that of the unsecured loan market. A report by CARE Ratings pegs the unsecured loan market at ₹13.2-lakh crores, which is roughly equal to the total exposure of the banking sector towards NBFCs (at ₹13.1-lakh crores).

In 2019, the risk weight on unsecured loans excluding credit cards was lowered from 125 percent to 100 percent to bring it on par with other retail loans. It has also been done to align risk weights with Basel III requirements.

Despite the repeated warning of banks, especially private banks, these loans are growing faster than secured retail loans. “If the trend continues for a longer period, the regulator may again increase the risk weights,” said a senior executive at a leading private bank.

There are no appropriate checks

With sacrificing personal loans and 30-minute penalties becoming common practice among banks, the regulator feels that adequate credit checks may not be in place.

“Currently with the rapid growth in this area, at the micro level, it has become difficult to assess the exact asset quality of these loans,” said a senior source. “The best way to avoid systemic risk is to reduce the pace of growth in the insecure space,” said another senior executive at a private bank.

Apparently, even on the microfinance side, banks have been told unofficially not to overgrow.

“Although MFI loan demand and collection efficiencies have improved since mid-2022, caution is warranted given the increase from small financial banks and non-bank financial firms,” said a person familiar with the matter.