Mint Explainer: Why the RBI wants to rein in the growing personal loan segment | spcilvly

The Reserve Bank of India (RBI) has expressed caution over rapid growth in certain personal loan segments, saying it is closely monitoring the situation for early signs of distress. RBI Governor Shaktikanta Das has asked banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address risk accumulation and institute adequate safeguards in their own interest.

Mint breaks development.

What constitute personal loans?

Personal loans, granted to individuals, include consumer loans, education loans, housing loans, and loans for investment in assets such as stocks and bonds. As of August, the outstanding balance in the personal loan category was at $47.70 billion, representing 37.7% of the incremental bank credit in the first half of the fiscal year.

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(Graphics: Perfect)

Why is the RBI worried?

The central bank has flagged the nearly 30% year-on-year (y-o-y) growth in retail credit seen in the last few years for many banks and NBFCs. Average unsecured retail growth stood at 23%. This exceeds the overall credit growth rate, which is between 12% and 14%. Although the overall asset quality in the personal loan sector has improved, impairment of credit card receivables has seen a slight increase.

The RBI’s June Financial Stability Report indicated a minor fall in gross non-performing assets (NPA) in personal loans to 1.4% in March 2023 from 1.9% in September 2022. On the contrary, the GNPA of credit card accounts receivable increased from 1.9% to 2%. during the same period. Goldman Sachs, in a June note, had pointed to an increase in payment delays of more than 30 days and a growing share of subprime customers on low-cost personal loans.

RBI’s regulatory action

During the monetary policy press conference in October, the RBI clarified that it was not planning regulatory actions, such as risk weights or provisioning adjustments, to control personal loan growth. He emphasized the advisory nature of his statement and urged banks and NBFCs to adopt strict internal prudential norms. Current rules assign risk weights of 100% and 125% to unsecured segments such as consumer loans and credit card receivables, respectively.

What do the bankers say?

Several bankers, on condition of anonymity, told Mint that they mainly provide personal loans to salaried individuals, backed by steady cash flows. They expressed confidence in the stability of the personal loan segment and attributed the increase in loan demand to higher consumer needs.

An August report by India Ratings highlighted the growing shift by NBFCs towards collateral-free lending in search of higher returns. Data from 12 leading NBFCs revealed that the share of unsecured loans increased to 30% in FY23, up from 26% in FY22 and 23% in FY21.

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