Specific segments of personal loans are exhibiting a notably high rate of growth, and the Reserve Bank of India (RBI) is monitoring them for potential signs of emerging stress.
The Reserve Bank of India (RBI) has now said in its monthly bulletin for October 2023 that banks and non-banking financial companies (NBFCs) should reinforce their internal surveillance mechanisms and address any accumulations of risks, while also implementing appropriate safeguards in the light of this development in their own interests.
According to recent data from the RBI, personal loans have experienced a substantial increase of 30.8 percent year-on-year (y-o-y).
“These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” RBI Governor Shaktikanta Das had said on October 6, 2023.
The RBI Bulletin, however, says that the Indian banking system is resilient and is ably supported by enhanced asset quality, stable credit growth, and robust earnings growth.
“Credit expansion is well-diversified and underpinned by the sound fundamentals of financial institutions. The financial metrics of non-banking financial companies align with those of the banking system, based on the latest data available for June 2023,” the RBI Bulletin said.
Retail loans surged by 18.3 per cent y-o-y in August 2023, and remained a principal contributor to overall credit growth. Notably, credit to the housing sector consistently expanded in double digits, registering a growth of 13.8 per cent in August. Vehicle loan growth also strengthened, reaching 20.6 per cent. Credit card loans exhibited a robust growth at 30 per cent in August 2023, indicative of heightened demand, particularly in contact-intensive services.
Over time, the composition of bank credit has undergone significant changes, with an increasing proportion directed toward services and retail loans. Despite these structural shifts, the impact of bank credit on the gross domestic product (GDP) growth appears to have intensified.
Incidentally, a report by SBI Research on October 20, 2023 also said that unsecured loans constitute only around 10 per cent of the total credit portfolio for all scheduled commercial banks (SCBs), thus suggesting a contained risk.
The share of secured loans outweighs that of unsecured ones in the retail space, thereby reducing the risk associated with unsecured credit, the report further says.
The ‘analysing time’ trend in retail loans shows no major compositional shifts since April 2021 for secured as also unsecured portfolio of retail credit. The report also says that the decline in credit card outstanding per card signals a favourable outlook for unsecured loans. Household debt as measured by credit card outstanding per credit card in India has been either static or declining both in nominal and real terms (after adjusted for CPI inflation) in 2023, the report said. This decline in real credit card outstanding per card, amid higher inflation expectations, is seen as a positive development.
According to the RBI Bulletin, the current imperative is a robust risk management approach and strengthened underwriting standards. Also, given the swiftly evolving global financial landscape, unforeseen challenges might arise. As such, the RBI is actively observing this evolving scenario to take proactive measures where necessary to uphold financial stability.