Unsecured Lending in India: Growth, Concerns, and Banks' Response

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Unsecured Lending in India: Growth, Concerns, and Banks' Response

Despite concerns raised by the Reserve Bank of India (RBI), unsecured credit within Indian bank loan portfolios remains elevated. Recent RBI data indicates a surge in credit card transactions, reaching Rs 1.66 trillion in January 2024, up from Rs 1.61 trillion in November 2023.The RBI has expressed concerns regarding the high levels of unsecured lending by banks. In November 2023, the central bank increased the risk weighting on unsecured loans, including personal loans and credit card loans, from 100% to 125%. This move aims to discourage excessive unsecured lending and bolster banks' capital positions.The increased risk weighting has led to a rise in slippages (defaults) in unsecured retail loans, particularly among segments with high risk profiles. Banks such as IndusInd Bank, Bandhan Bank, RBL Bank, and Yes Bank, as well as shadow banks like SBI Card, have been affected.Despite the challenges posed by unsecured lending, the loan growth of private and public sector banks remains strong. Private sector banks saw a 18.2% year-over-year (Y-o-Y) growth in Q3 FY24, while public sector banks experienced a 14.6% growth.

Post-Q3 earnings calls indicate that banks are prioritizing the strengthening of their secured lending portfolios in alignment with the RBI's guidelines. This shift will likely mitigate the risks associated with unsecured lending and ensure the stability of the Indian financial system.