India’s central bank is currently not looking to tweak existing norms related to banks’ unsecured lending portfolios as a sector-wide buildup of stress is not yet in sight, two people familiar with the matter told Reuters.
Indian banks have seen a sharp rise in unsecured loans – mostly personal loans and credit cards – that has outpaced the overall bank credit growth of about 15% over the past year, catching the Reserve Bank of India’s (RBI) attention.
Banks’ outstanding receipts from credit cards rose to 2.18 trillion rupees ($26.26 billion) as of Aug. 25, from 1.68 trillion rupees a year earlier, latest data from the RBI showed. Outstanding personal loans rose 26% in the same period.
“The problem is not systemic at this point and is restricted to select four-five banks,” one of the people, who is familiar with the central bank’s thinking, said. The person did not name the banks.
“The RBI has already cautioned these banks and has strengthened its vigilance around unsecured loans, but increasing risk weights on unsecured lending may not be necessary at this point.”
Both the sources declined to be identified because they are not authorised to speak to the media. The RBI did not reply to a Reuters’ email seeking comment.
As per RBI norms, risk weights – or the capital that banks need to set aside for every loan – on unsecured personal loans and outstanding on credit cards currently stands at 100% and 125%, respectively.
“The deployment of overall bank credit to credit cards and personal loans as compared to the total proportion of loans in the system is not very alarming at this stage for the RBI to increase risk weights,” the second person said.
RBI Governor Shaktikanta Das earlier this month said the central bank is closely monitoring some fast-growing personal loan categories for signs of nascent stress.
Subsequently, Reuters reported that the RBI is particularly concerned with the surge in tiny personal loans of up to 10,000 rupees, taken for three to four months.
Analysts, too, have been cautious about rising risks of banks’ unsecured retail loans turning sour. UBS downgraded Indian banks this month, citing increasing default risks in retail unsecured loans.
