RBI Cautions Banks Regarding Unsecured Personal Loans, Urges Heightened Surveillance

Banks and NBFCs should prioritise enhancing their internal surveillance mechanisms, addressing any potential risks, and implementing appropriate safeguards in their own best interests. It is crucial to prioritise robust risk management and reinforce underwriting standards. Certain components of personal loans are experiencing significant growth. The Reserve Bank is closely monitoring these for any signs of potential stress.

While the overall performance of banks and NBFCs appears to be improving, including a decrease in gross non-performing assets (GNPAs), the RBI’s warning about personal loan growth serves as a reminder for lenders to remain cautious about potential challenges in the future. The retail credit sector has experienced significant year-on-year growth in the past few years, with most institutions seeing an increase of close to 30 percent.

Additionally, unsecured retail credit has grown by an average of 23 percent. When compared to the 12-14 percent credit growth in other segments, the growth in unsecured retail credit appears to be an anomaly. The outstanding balance on credit cards alone has increased by 30 percent, reaching Rs 2.17 lakh crore within a year. Banks offer unsecured loans to customers based on their income and credit rating. Due to the significantly high interest rates associated with these loans, borrowers will be required to make substantial monthly repayments.

Since the level of growth is exceptional, it is important to enhance the internal surveillance mechanisms of the banks. This will allow the banks to proactively address any potential risks that may be accumulating, rather than facing negative consequences in the future.