In his statement accompanying the monetary policy review, central bank Governor Shaktikanta Das said that though banks and NBFCs continue to be resilient, certain components of loans are recording very high growth.
“We have to be mindful of what can, going forward, pose a challenge and become a future risk. In certain segments of retail credit, we saw high growth,” Das said after the monetary policy review meeting in Mumbai. “So, it is only to caution banks to strengthen their internal surveillance systems, watch the trends and take whatever measures are required.”
Governor Das urged banks to monitor the incoming data on advances more closely to pre-empt systemic risks stemming from a loan segment that is considered more vulnerable than those backed by adequate collateral. To be sure, unsecured loans make up less than a tenth of the formal credit mechanism in India.
“The Reserve Bank‘s supervision department monitors it very intensively, but the first line of defence is banks and NBFCs themselves,” Das said during his media interaction after the policy announcement. “So, it is to sensitise them about the credit growth and not lull them into any complacency.”
ET BureauDeputy governor J Swaminathan, who leads the supervision department at the Reserve Bank of India (RBI), said the central bank has been monitoring unsecured retail loans that have expanded 33% on average for the last couple of years – more than double the 12% to 14% growth for the rest of the sector.”As a supervisor, it is our intention to inform the banks that this is an outlier level of growth. So, strengthen your internal surveillance mechanisms so that any risk that may likely be building up is handled upfront rather than coming to grief later,” Swaminathan said.Portfolio Under Lens
Analysts have also been watching the unsecured portfolio closely. In a report in August, Nomura Securities said that credit costs for unsecured loans could make up between 60% and 70% of total provisions for large private sector banks in FY25 after a strong 26% growth in this segment the past five years.
Credit cost is the amount of provisions banks have to take to make up for loan losses. It is expressed as a percentage of the loan book.
Although unsecured loans including credit cards make up only 9.85% of total banking system loans, the uncollateralized nature of the loans has always kept them under regulatory scanner.
Swaminathan said the regulator has kept its options open.
“We have not announced any regulatory measures at this point of time, but we would expect as a first line of defence, banks, NBFCs and fintechs to take appropriate internal controls,” he said. “In case we don’t see internal controls playing out, then we will examine. At this point of time, it is only advisory.”
The ability of banks and fintechs to lend through digital modes has also led to far greater growth for this segment compared with others.
“We are mindful of that in terms of the opportunity and the ease and convenience that has been brought through the digital mediums. When we see any outliers, they are reached separately,” Swaminathan said.
