Unsecured Loans Are Flourishing, But RBI Could Be Eyeing Tighter Strings

Personal loans and credit cards are the flavour of the season in Indian banking, but the country's central bank doesn’t seem too happy about it. 

The Reserve Bank of India may have plans to make it harder for banks to write such loans by raising the risk weight of unsecured lending on bank balance sheets, according to two people familiar with the matter, who spoke on the condition of anonymity. If risk weights are raised, the banks may have to set aside higher provisioning against such loans. 

The risk weights on such loans may be raised from 125% currently to 140%, the first of the two people mentioned above said. But given the high margin that banks earn on personal loans, raising the weights may not necessarily have the desired impact of slowing things down, the person said.  

A query mailed to the RBI on Tuesday remained unanswered.

“On the RBI’s side, the concern could be that the pace of growth is too fast,” Karthik Srinivasan, group head of financial sector ratings at ICRA, told BQ Prime. But given the increased availability of data to underwrite customers on, banks may feel they can cherry-pick their customers and stave off any challenges, he said. 

Even if there are some challenges, banks today have the necessary financial strength to deal with them, Srinivasan said.

The divergence in the thinking of banks and the RBI about the segment also comes at a time when other lending verticals, such as corporate lending, have stayed relatively quiet. This, in turn, has also contributed to pushing banks towards the wallets of retail borrowers.

"In the last 4-5 years, we have seen little growth in corporate lending and the well-rated large corporates have actually deleveraged themselves," Ajit Velonie, senior director at credit rating agency Crisil Ratings Ltd., told BQ Prime.

At the same time, banks have also focused on building more granular asset relationships to avoid the concentration risk that exists in corporate loans, he said.

After a brief period of middling growth during the Covid-19 pandemic, personal loans made by Indian banks have grown quickly.

At the end of the previous financial year, outstanding credit card loans rose 31.5% year-on-year to Rs 1.94 lakh crore and overall unsecured loans grew by 26% to Rs 12.95 lakh crore. At the same time, non-food credit saw an aggregate expansion of 15% year-on-year to Rs 136.5 lakh crore. 

About 12-15 months down the line, if large corporate or infrastructure projects kick off, then banks will need to take a call on the appropriate mix of retail and wholesale lending, Srinivasan said. Till then, lenders also appear somewhat dependent on the retail segment to power their growth.

While credit card spending has robustly contributed to this growth, it has also been accompanied by a shift in consumer behaviour. Rising spends on credit cards are being driven by transactional uses instead of large-ticket purchases or EMIs, according to a private banker, who spoke on condition of anonymity. 

Spending per card has risen phenomenally over the last two years, but revolver rates have consistently gone down, the first of the two people mentioned earlier said. For credit cards, revolvers are customers who carry balances month over month instead of paying in full. 

For SBI Cards and Payment Services Ltd., the share of revolvers in its receivables mix has dropped from 28% in March 2021 to 24% in March this year. In the same period, the mix of transactors, or people who pay back in full, has climbed from 27% to 39%. 

The rising share of transactors in credit cards has also buoyed confidence among bankers and they don't appear to be concerned about worsening asset quality on such loans. However, data from credit bureau, TransUnion CIBIL, indicates that performance of the credit card portfolio worsened in December 2022.

Balances, which were overdue for more than 90 days on credit card accounts, climbed 25 basis points year-on-year to 2.31% in December, according to TransUnion CIBIL data. It also showed that collection efficiencies for both personal loans and credit cards deteriorated in the October-December quarter.

Out of a total of 100 credit cards issued by banks, 30 generally turn delinquent, said Anand Agrawal, co-founder of loan collections firm Credgenics. This is largely because customers forget to pay their credit card bill on time. Within the first 30 days, you tend to see about three-fourths of this customer base repay their dues, he said.

Overall, only about 4-5% of the delinquent customers continue to remain in default, Agrawal said.

The recent growth in personal loans, on the other hand, has come on the back of smaller loans being availed by a younger cohort of borrowers, the private banker mentioned earlier said.

Although private banks have kept their focus on salaried customers for unsecured lending, public sector banks—excluding the State Bank of India—have increased their focus on self-employed cohorts, according to an executive at a private equity firm, which invests in Asian banks, who spoke on the condition of anonymity.

A reliance on self-employed customers for unsecured loans could come at a price, since such a cohort tend to be disproportionately impacted during an economic downturn.

Problems such as these can further be compounded by over-reliance on credit score data to sanction such loans, a majority of which are sourced digitally. While credit scores offer a reflection of the customer's payment history, credit utilisation and diversification, they also tend to be lagged indicators which typically show a three-month delay in the data.

Despite RBI raising benchmark interest rates by 250 basis points since May 2022, the change is yet to fully reflect in interest rates for unsecured loans.

While rates on home loans have risen by about 200 basis points since last year, personal loans have only seen an uptick of about 25-30 basis points, the private equity executive mentioned earlier said. This suggests that banks were earning large spreads on such credit to begin with and are comfortable sacrificing some of it in a bid to stay competitive.

The change in customer behaviour on credit cards, though, has also shaken up banks' revenue model. While banks are hoping for a change, if revolvers continue to fall, banks may increase annual fees or make point conversion more difficult on credit cards, according to the first person mentioned earlier.

On the one hand, a rise in unsecured lending has the Indian central bank thinking about how to slow it down. On the other hand, banks giving such credit find the segment lucrative enough to accept a compression of their margin and are operating in a tepid corporate lending environment.

"For any fast-growing segment, we continue to monitor asset quality performance. But so far, we have not seen any increase in NPAs," Velonie said.

Although bankers have stayed sanguine on asset quality, the private equity executive quoted above said that a downturn could very well play out in the next couple of quarters. Banks, which have ventured into fresh products and customer cohorts—especially among public sector banks—could be the pain points to watch out for, this person said.