Growth in personal loans

While RBI classifies all retail loans as personal loans, there is a specific category of bank loans that it classifies as ‘other personal loans’. These loans include credit for domestic consumption, medical expenses, travel, marriage and other social ceremonies and loans to repay debt, besides others. 

‘Other personal loans’ rose 26% y-o-y to ₹12.2 trillion in August. In fact, this category has grown 56% in the past two years, according to RBI data. That apart, outstanding amounts on credit cards also increased 30% yoy in August to ₹2.17 trillion. 

Private banks and non-bank financiers have been operating in the unsecured personal loan space for some time now, but state-owned lenders are also trying to make the most of the uptick in demand for these loans. Although the wider retail loan category has grown in the past few years, it includes the impact of the rapid growth in home loans, a secured asset category. Since unsecured loans are not backed by collateral, recovery is harder in cases of default. 

Meanwhile, credit bureau TransUnion Cibil said in a report in April that vintage delinquency (the percentage of loan accounts where repayments have been delayed by over 30 days in the first six months) in personal loans was higher in the December quarter of 2022 than in the pre-pandemic period.

RBI’s concerns

The banking regulator recently cautioned lenders about the surge in personal loans. Governor Shaktikanta Das said earlier this month that the RBI has seen high growth in certain segments of retail credit and just wants to caution banks to strengthen their internal surveillance systems, keep an eye on trends, and take whatever measures are required. He said RBI’s supervision department monitors this closely, but lenders themselves must act as the first line of defence. 

Mint reported in June that the RBI was likely to raise risk weights on unsecured loans by 10-25 percentage points to caution banks against unfettered lending in this category. The higher the perceived risk, the greater the risk weight assigned to a particular loan category. Personal loans are usually meant for consumption and it is difficult for lenders to determine the end use of such credit. Industry experts are also mindful of any incipient stress in this portfolio and believe that though small in size, stress in personal loans could spread to other portfolios if not treated with caution.

Bankers’ view

Bankers pointed out that delinquencies are rising in a specific category of personal loans – those below ₹50,000 – and that most large banks have a tiny presence in this segment. According to TransUnion Cibil, loans below ₹50,000 accounted for about 2% of all personal loans. Data from credit information company Crif High Mark suggests a strong appetite for small personal loans, with origination volume increasing to 19.3 million in Q3 FY23 from 15.5 million in Q3 FY22 and 7.4 million in Q3 FY21. 

Non-bank lenders in the fintech space are the primary source of funds for this category of borrowers, with 73.4% of loan origination volumes belonging to them in Q3 FY23. Meanwhile, public and private sector banks together accounted for 13% of the volume in the same period. 

Bankers also said their unsecured portfolios were holding up well. For instance, Kotak Mahindra Bank’s share of unsecured retail loans — including retail microfinance — in net advances was at 11% as of 30 September, up from 8.7% in the same period last year. 

“As we look at cards and the broader unsecured [portfolio], the slippages and delinquencies are still in line with levels which we are comfortable [with]. We are not seeing anything which [makes us] believe we should change trajectory or change growth. So, nothing to worry about,” Paul Parambi, group president and chief risk officer, Kotak Mahindra Bank, told analysts on 21 October.