The Reserve Bank of India (RBI) has recently warned banks and non-banking financial companies (NBFCs) to be cautious about retail loans, especially unsecured loans. The RBI’s caution comes as there has been a sharp rise in some types of unsecured loans, such as personal loans and credit cards.
A report by the Credit Information Bureau (India) Limited (CIBIL) 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 public sector banks (PSBs).
The CIBIL report also shows that collection efficiency for personal loans and credit cards has fallen from the December quarter to the year-ago quarter. Additionally, delinquency – which CIBIL defines as borrowers who delay their interest payment by more than 30 days within the first six months of getting a loan – has risen for personal loans compared to pre-COVID levels.
In an interview with CNBC-TV18, Rajesh Kumar, MD and CEO of CIBIL, said that the RBI’s caution about unsecured loans is “timely advice and prudent” because the growth story in this segment needs 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.
Shanti Ekambaram, President-Consumer Banking at Kotak Mahindra Bank, said that 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,” she said.
Karthik Srinivasan, Senior VP and Co Group Head-Financial Sector Ratings, ICRA, said that “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.”
The RBI’s caution about unsecured loans is a timely reminder that responsible lending is essential to ensure the long-term health of the financial system. Banks and NBFCs need to carefully assess the creditworthiness of borrowers before extending loans, and they need to have robust collection mechanisms in place to ensure that borrowers repay their loans on time.