For the second time this year, the Reserve Bank of India (RBI) raised a red flag on rising personal loan exposure, warning non-banking finance companies (NBFCs) to strengthen their risk management system.
The RBI had issued a cautionary note to banks in April 2023 regarding their unsecured loan portfolios, which include personal loans, credit cards, small business loans, and microfinance loans. This warning came after some banks aggressively expanded their unsecured loan portfolios.
However, the first RBI warning has gone unheeded as banks have doubled the growth of personal loans in the immediate five months.
The rapid growth
As of August 2023, the total credit extended to the personal loan segment stood at Rs 47.70 lakh crore, a substantial increase from Rs 36.47 lakh crore in August 2022. The period from April 2023 to August 2023 witnessed significant growth, with credit rising from Rs 40.85 lakh crore to Rs 47.70 lakh crore, marking a 16.8% increase, compared to just 7% during the same period the previous year.
With the exception of consumer durables, loans against fixed deposits, and loans to individuals against shares and bonds, most personal loan categories experienced robust year-on-year growth. The housing segment received the lion’s share of total credit, amounting to around Rs 24.56 lakh crore, reflecting a substantial 37.7% YoY growth, compared to 16.3% the previous year.
Credit card growth
The credit card segment also demonstrated strong growth, with a 30% increase, compared to 26.8% in the previous year. Credit for education surged by 20.2%, a notable rise from the 11% growth seen the previous year. Vehicle loans and loans against jewellery recorded year-on-year growth rates of 20.6% and 22.1%, respectively, compared to 19.5% and 9.2% the previous year.
Other personal loans, amounting to Rs 12.20 lakh crore in August 2023, compared to Rs 9.68 lakh crore in August 2022, saw a growth rate of 26% , surpassing the previous year’s rate of 23.8%.
However, some segments, including consumer durables, loans against fixed deposits, and loans to individuals against shares and bonds, experienced slower growth rates. Consumer durables grew by 11%, down from the previous year’s 51% growth. Advances against fixed deposits and loans to individuals against shares and bonds also exhibited slower growth, with rates of 19.9% and 4.2%, respectively, compared to 38.1% and 19.3% in the previous year.
What RBI said
In the latest monetary policy review the RBI said that while the banking system continues to be resilient, due to improved asset quality, stable credit growth and robust earnings growth, and financial indicators of NBFCs are also in line with the banking system, certain components of personal loans are recording very high growth.
“These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards,” RBI governor Shaktikanta Das said.
Banks are aggressively expanding their personal loan portfolios, with year-on-year credit growth in this segment reaching 30.8%, compared to 19.4% in the previous year.
