- As stated in the Reserve Bank of India’s (RBI) July financial stability report, there is growing cause for concern regarding the recent spike in consumer lending, especially unsecured loans.
- Over the last two years, retail loans have increased at an unsettling rate that is almost twice as fast as gross advances.
- During this time, there has been a change in the proportion of secured to unsecured loans, with an increase in the former and a consequent rise in concerns regarding possible risks.
Changing Composition and Disturbing Trends
- According to the financial stability report, the percentage of special mention accounts in public sector banks where the principal or interest is past due is 9.8% for unsecured advances and 9.2% for secured advances, respectively.
- The percentages in private sector banks are 4% and 5.4%, correspondingly.
- Concerns over the ability of borrowers in both sectors to repay debt are raised by this data.
- In the October monetary policy statement, RBI Governor Shaktikanta Das highlighted particular concerns about the quickly expanding personal loan market and urged banks and non-banking financial institutions (NBFCs) to bolster their internal monitoring systems and mitigate any possible threats.
Regulatory Response and Increased Risk Weights
- The RBI has taken action to reduce the exuberance observed in loans to select groups, especially in the sub-Rs 50,000 category of unsecured loans, in response to these concerns.
- The central bank raised the risk weights for consumer loans made by banks and NBFCs last week (with the exception of loans for homes, education, cars, and gold).
- This action is a calculated attempt to reduce the possible risks linked to a high degree of exposure in the mainly bank-funded NBFC industry.
Impact on Cost of Capital and Supply-Demand Dynamics
- Both the supply and demand sides of the market may be impacted by the regulatory actions, especially the increase in risk weights, which may have an effect on the cost of capital for these loans.
- The RBI reports that household loans/borrowings from NBFCs increased significantly between 2021–2022 and 2022–2023—from Rs 21,432 crore to Rs 2.39 lakh crore.
- There are worries about a possible downturn due to the increased risk of non-payment in the unsecured lending market, particularly for customers with less favorable credit profiles.
The Need for Vigilance and Targeted Regulatory Measures
- Vigilance is necessary as signs of stress and potential hazards in the financial system become apparent.
- The UBS analysis, which shows an increase in the likelihood of unsecured loan default, emphasizes how urgently focused and well-crafted regulatory actions are needed.
- To ensure the stability of the financial system in the face of changing consumer credit dynamics, the central bank must continue to closely monitor the market and respond to any indications of stress.