The Indian banking sector faces a mounting challenge as stressed unsecured loans in bank portfolios soar, crossing the alarming threshold of Rs 93,240 crore. This revelation comes at a time when banks have been quick to lay blame on non-banking finance companies (NBFCs), particularly fintechs operating digital lending apps, for the surge in unsecured loans. However, a closer look reveals that banks themselves are grappling with a significant share of these risky assets, which are showing signs of distress or overdue payments.
The latest data exposes that banks are currently holding a staggering Rs 93,240 crore of unsecured loans in the Special Mention Accounts (SMA) category. These accounts account for nearly seven percent of the total unsecured loans outstanding, amounting to a substantial Rs 13.32 lakh crore.
Delving into the details, it becomes apparent that public sector banks bear the brunt of the stress in unsecured personal advances, with a concerning 9.9 percent of their unsecured personal advances falling under the SMA category. In contrast, private sector banks exhibit a relatively lower proportion, with only 4.0 percent of their unsecured retail loans teetering on the edge of stress. Collectively, banks hold approximately seven percent of their unsecured retail loans in the SMA-0, 1, and 2 categories.
According to the Reserve Bank of India’s (RBI) classification, SMA-0 signifies that the principal or interest payments have not exceeded 30 days overdue but are displaying initial signs of distress. In SMA-1, payments have been overdue for 31 to 60 days, while SMA-2 denotes overdue payments between 61 to 90 days. Loans that remain unpaid for more than 90 days are classified as non-performing assets (NPAs), further intensifying the banking sector’s woes.
The surge in unsecured personal loans, encompassing credit card receivables, consumer durable loans, and other personal loans, has outpaced the growth of general personal loans. From March 2017 to March 2023, unsecured personal loans have surged by 21 percent, while general personal loans have exhibited a comparatively modest growth of 19 percent during the same period. This puts unsecured personal loans at the forefront, constituting nearly one-third of the total personal loan credit in banks, totaling Rs. 40.9 lakh crore as of March 31, 2023. Notably, NBFCs have played a significant role in this segment, contributing Rs 10.9 lakh crore to the personal loans market, according to a report by Care Ratings.
A recent poll conducted by Care Ratings has assessed the potential impact of souring unsecured personal loans on various lender categories. The results indicate that fintech NBFCs are the most susceptible to the fallout, followed by private sector banks, public sector banks, and other NBFCs in decreasing order of potential impact. This highlights the imperative need for a vigilant approach to risk management, particularly for fintech NBFCs involved in the unsecured personal loan segment.
Adding to the complexity of the situation, banks have steadily increased their loan exposure to NBFCs, with figures rising from Rs 7.75 lakh crore in March 2021 to Rs 9.23 lakh crore by September 2022. The Centre for Advanced Financial Research and Learning (CAFRAL), established by the RBI, has raised concerns about the escalating bank financing for NBFCs. CAFRAL, a not-for-profit organization, has sounded the alarm, citing potential systemic contagion and emphasizing the necessity for stricter preventive measures to mitigate the looming systemic fallout.
Unsecured personal loans, which do not require collateral from borrowers, have been widely facilitated by numerous legal and illegal digital lending apps, contributing significantly to the rapid expansion of this segment.
In response to the escalating risk, the RBI has taken measures to curb aggressive lending to consumer credit, credit card receivables, and NBFCs. On November 16, 2023, the central bank increased the risk weights on these exposures by 25 percent, elevating them to 150 percent. This strategic move is aimed at encouraging responsible lending practices in these segments. Notably, credit card outstanding for banks surged by 29.9 percent year-on-year to Rs 2.17 lakh crore as of September 2023.
The growth in demand for unsecured personal loans can be attributed to several factors, including demographic shifts, the formalization of the economy, increased purchasing power, the ascendancy of fintechs, widespread access to the internet and mobile phones, the adoption of digital payment systems, the influence of India’s financial infrastructure, and the broader coverage of credit bureaus. The convergence of technology and finance has redefined India’s lending landscape, making personal loans more accessible and convenient for a larger segment of the population, thus fueling the expansion of the personal loan market, as reported by Care Ratings.