The Reserve Bank of India (RBI) has raised concerns over risks in the retail lending segment, particularly in unsecured loans, even as regulatory measures implemented in November 2023 appear to be yielding results. India’s banking regulator highlighted in its financial stability report that while the growth of unsecured retail lending has moderated, other indicators point to potential vulnerabilities.
The growth rate of unsecured retail lending slowed significantly from 27% in September 2021 to 15.6% in September 2024. This decline coincides with measures introduced to tighten credit risk management and underwriting standards. However, despite this moderation, the RBI has pointed to certain stress signals within the segment.
Stable loan quality, but rising write-offs raise red flags
Banks have managed to maintain stable asset quality in their overall retail loan books. The gross non-performing asset (GNPA) ratio for retail loans stood at a low of 1.2% as of September 2024. However, the GNPA ratio for unsecured lending was marginally higher at 1.7% during the same period, indicating relatively greater stress in this category.
One area of concern flagged by the RBI is the sharp rise in write-offs, particularly among private sector banks. The central bank suggested that these write-offs might be masking a deterioration in asset quality and pointed to a potential dilution in underwriting standards. This trend has amplified the risks associated with unsecured retail loans.
Unsecured loans dominate fresh NPA accretion
The report also revealed that slippages in the unsecured loan book dominated fresh additions to NPAs in retail loan portfolios. As of end-September 2024, 51.9% of slippages in retail loans came from unsecured lending, highlighting the heightened risk profile of this segment despite the regulatory interventions.
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Small finance banks under pressure
The RBI further noted that small finance banks (SFBs) are witnessing larger impairments in their retail lending portfolios. The GNPA ratio for SFBs’ retail loans stood at 2.7% as of September 2024, significantly higher than the overall retail loan GNPA ratio.
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(Edited by : Shoma Bhattacharjee)
