Rising risk of unsecured retail loans in India

Subject: Economy

Section: Monetary Policy

Increasing Risk: UBS highlights the growing risk of unsecured retail loans turning bad in Indian banks as lending to borrowers with overdue debt has risen.
Pandemic Impact: The stress on household finances due to the pandemic has eased, leading to a boost in unsecured lending portfolios by lenders in the country.
Regulatory Scrutiny: The Reserve Bank of India (RBI) has indicated its close monitoring of the segment for early signs of stress, reflecting the significance of the issue.
UBS’s Observations: UBS has conducted a study, which indicates a rise in the share of loans to borrowers with weaker risk profiles and increased leverage among retail borrowers.
Data Insights: Central bank data shows a significant increase in outstanding receipts from credit cards and personal loans, further emphasizing the rapid growth in unsecured lending.
Changing Metrics: The share of lending to borrowers with overdue loans and the number of borrowers with multiple retail loans has notably increased over the past few fiscal years, signaling potential risks.
Impact on Bank Ratings: UBS has downgraded its rating on State Bank of India and Axis Bank, citing rising credit costs as the reason for the change.
Unsecured Loan Proportions: Unsecured loans as a percentage of total loans have risen for banks like SBI and Axis Bank, further underscoring the potential vulnerability in their lending portfolios.

Status of Unsecured Loans:

Unsecured loans reached from 5 lakh crore in April 2019 to 11.1 lakh crore in April 2023.
Banks turned to retail loans due to defaults on project loans, leading to rapid growth in unsecured credit card debt and personal loans.
Unsecured loans are growing at a rate of 30-31% annually, outpacing overall system credit growth of 8-9%.
Despite constituting less than 8% of outstanding bank credit, unsecured retail loans are growing faster, warranting attention from risk managers and regulators.

Concerns and Significance:

Past experiences highlight challenges in recovering loans in case of defaults.
Unsecured loans are crucial for sustaining India’s consumption momentum and showcasing robust credit growth for banks.
Improved data quality and technical interventions have facilitated better monitoring of retail borrowers and loan extension to prime candidates.
Intense competition among lenders catering to the same segment may dilute credit standards, resulting in poor risk pricing and potential negative outcomes.

Recommended Actions:

Public sector banks should prioritize technology adoption and strengthen alternative credit scoring and data analytics.
Indirect acquisition of retail exposures through securitization or assignment deals with NBFCs or small finance banks can help manage risks effectively.
Niche lenders should exercise caution due to their vulnerability to liquidity risks and external shocks, necessitating conservative exposure limits for unsecured retail loans.