As risks loom, RBI asks banks not to increase exposure to unsecured loans to avoid banking sector crisis

The Reserve Bank of India (RBI) is urging domestic banks to keep a close eye on their retail portfolios, especially unsecured loans, as part of increased caution in the face of growing macro-economic uncertainties and bank collapses in the US and Europe, the Hindu BusinessLine reported.

The average share of unsecured loans in all private banks has increased by more than 300 basis points since June 2020, which hasn’t gone over well with the RBI, the report said.

A CEO of a private bank told the Hindu BusinessLine that the RBI has instructed banks to limit their unsecured loan portfolios to the levels seen in FY23.

Credit deployment

According to the latest credit deployment data published by the RBI, unsecured loans issued between February 2022 and February 2023 totaled Rs 2.2 trillion, which was higher than the Rs 1.18 trillion deployed to large corporations.

During this time, the market for home loans was just slightly larger than the market for unsecured loans, at Rs 2.49 trillion. A report by CARE Ratings also shows that the unsecured loans market is valued at Rs 13.2 trillion, which is nearly equal to the banking sector’s overall exposure to Non-Banking Financial Corporations (NBFCs) (at Rs 13.1 trillion).

Meanwhile, in 2019, the risk weight on unsecured loans was reduced from 125 per cent to 100 per cent, bringing them in line with other retail loans. It was also done to conform the risk weights to Basel-III standards.

“Despite numerous warnings to banks, particularly private banks, these loans are growing more rapidly than secured retail loans. If the trend persists for a longer period of time, the regulator might increase the risk weights once more,” a senior executive of a leading private bank said.

No adequate checks

The regulator believes that adequate credit checks may not be in place as banks are increasingly sachetising personal loans and sanctioning them in 30 minutes.

Another top executive of a private bank said, “Right now, with rapid growth in this space, at a micro level, it is becoming difficult to assess the exact asset quality of these loans.”

Reduced growth in the unsecured space is the best way to avert a systemic risk, he added.

Banks have reportedly received informal warnings not to overextend growth, even on the microfinance side.

“Even though demand for MFI loans and collection efficiencies have improved since mid-2022, it warrants caution given the increase from small finance banks and NBFCs,” a person familiar with the matter said.