Quick, easy personal loans may become difficult now as RBI tells banks, NBFCs to be more careful

Getting quick and easy personal loan will get difficult for more and more borrowers in coming days as RBI has cautioned banks and NBFCs against the steep rise in the personal loan disbursal. Most of the lenders have been focusing more on retail credit which led to very high growth of the personal loan disbursal. This led to the central bank asking lenders to exercise caution while extending personal loan.

The RBI governor Shaktikanta Das, in his monetary policy review speech today, cautioned banks to exercise due diligence while giving personal loans as these have recorded a sharp increase.

He said; “Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards.”

The central bank has been observing the new trend in personal loan growth for quite some time. When the growth in disbursal of personal loan reached to an alarming high level, the world of unsecured lending attracted the attention of the Reserve Bank of India. On August 25, RBI Governor Shaktikanta Das met the top management of upper-layer nonbanking financial companies (NBFCs), including housing finance companies (HFCs). Among other talking points, the RBI held discussions on the risks associated with high credit growth in the retail segment, mostly in the unsecured category. “…the Governor advised that the NBFCs and HFCs need to remain alert to avoid any complacency during good times,” the RBI said.

Retail loans in the Indian banking sector grew at a compounded annual growth rate (CAGR) of 24.8% between March 2021 and March 2023, the RBI said in its Financial Stability Report in June. It far outstripped the 13.8% CAGR of banks’ gross advances. The retail segment accounted for one-third of the gross loans in the banking system, the RBI said.

Share of unsecured retail loans grew to 25.2% from 22.9% in March 2021-2023, while secured loans eased from 77.1% to 74.8%, the data showed.Banks’ unsecured loan portfolio amounted to close to Rs 12 lakh crore as of end July. In an August 29 report, Nomura Global Market Research’s analysts say that while most lead indicators do not flag imminent risks for banks, the regulator’s “repeated warnings” on unabated growth in the segment as well as concerns on rising consumer leverage have sparked investor concerns.