The Indian government has asked state-run banks to be more careful when lending money to individuals, after the Reserve Bank of India (RBI) warned of signs of stress in the retail loan segment.
Banks will be required to conduct regular stress testing and adopt risk-based profitability models for all loan portfolios.
Government nominees on bank boards will ensure that stress analysis reports are discussed at all relevant meetings.
Banks may need to recalibrate their internal credit rating systems and strengthen their underwriting and recovery processes.
The government has also suggested that banks collect information from credit information companies to identify customers who have credit facilities with other lenders.
Banks may offer better options to these customers in order to switch them over to their own business.
Bank retail loans in India have grown at a compound annual growth rate of 24.8% from March 2021 to March 2023.
Retail loans now constitute one-third of gross advances, with the share of unsecured retail loans increasing to 25.2%.
A recent report by UBS warned that public sector banks are likely to have higher defaults than their private counterparts, as credit losses from unsecured retail loans could increase 50-200 basis points in 2024-25.
The Indian government’s move to ask state-run banks to strengthen their loan risk assessment parameters is a welcome one. It will help to protect banks from losses and ensure that credit is extended to borrowers who are most likely to repay their loans.