A tsunami of unsecured loans forming in the banking system is making India’s central banker jittery. To tame the beast, the Reserve Bank of India (RBI) recently increased the risk weight of certain unsecured loans. 

In the past five and a half years (between FY18 and H1 FY24) credit card loans have trebled in volume, from ₹70,000 crore to ₹2.2 lakh crore (23% CAGR). The personal loan portfolio in the Indian banking system also expanded and grew almost two and a half times from ₹5.1 lakh crore to ₹13.4 lakh crore (a 19% CAGR).

Matching the pace, scheduled commercial banks’ lending to NBFCs has also grown massively. In the last 18 months, loans to NBFCs have shown an astonishing 42% rise from ₹10 lakh crore to ₹14.2 lakh crore. In the last five and a half years (between FY18 and H1 FY24) banking system loans to NBFCs grew from ₹5 lakh crore to ₹14.2 lakh crore, a 21% CAGR.

As per RBI, the outstanding loan in Indian banking system is ₹156 lakh crore and cumulatively, unsecured personal loans, credit card loans and banks’ loans to NBFCs are 19% of this outstanding loan portfolio or one fifth of the entire banking system loans are unsecured. 

The Ecosystem that boosted Lending

Many factors are responsible for the changing dynamics and unprecedented growth of unsecured borrowings in India. While a part of it may be attributed to the rise in consumerism, what's not clear is whether this is a result of deteriorating financial conditions of households amidst rising consumer aspirations.

The growth of the digital economy is pivotal to providing access to easy loans to a huge number of consumers. Masses that had hitherto shied away from borrowing for the sake of a better present and preferred saving for the future may also have been deterred by the unattractive saving rates in an era of high inflation.

The cumulative ecosystem of rise in e-commerce, fintech start-ups, AI based credit scoring, digital technology adoption, innovation in credit and loan based products, declining savings rates, and inflation have contributed to proliferation of credit card economy and off-the-chart borrowings by consumers and smaller businesses.      

As per CLSA, unsecured credit by large Banks is 5-13% of their total loans while loans to NBFCs constitute another 5-12%. 

Changes by RBI and estimated impact 

The risk weights on banks’ unsecured personal loans and consumer durable loans have been increased from 100% to 125%, and risk weights on credit cards have been increased from 125% to 150%. The risk weights on NBFCs’ unsecured personal loans, consumer durables loans and credit cards have increased from 100% to 125%. Those on loans by Banks to NBFCs have also been hiked by 25% if the risk weight is below 100% as risk weight depends on Credit Rating of the NBFCs.

CLSA reports that SBI Cards and Bajaj Finance are the most affected NBFCs where 100% of loan book is impacted in SBI Cards case while 38% of Bajaj Finance loan book will be impacted due to rise in risk weight to unsecured consumer loans and credit card loans. Amongst banks, IndusInd Bank will be the least impacted as just 10% of its loan portfolio consists of unsecured loans where risk weight has been enhanced. For other Banks at least 15%-20% of their books will be impacted, CLSA notes.

CLSA estimates that on account of rise of risk weight, there will be a direct impact of 40-80 basis point reduction in Tier I capital for Banks and 230 and 415 basis points reduction for Bajaj Finance and SBI Cards respectively. Even after reduction in Tier 1 Capital, banks are well capitalised and should not need to raise additional capital, CLSA notes.

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