The Reserve Bank of India (RBI) on Friday, October 6, cautioned on high growth in some segments of personal loans. While announcing the bi-monthly monetary policy review, RBI Governor Shaktikanta Das said that certain components of personal loans are recording very high growth and these are being monitored for any incipient stress.
Das further said that credit growth is broad based and backed by strong fundamentals of financial institutions. He added that banks and non-banking financial companies (NBFCs) would be well advised to strengthen their internal mechanism to address any risk coming in.
This comes at a time when financial industry has already been raising concerns about the potential buildup of credit risk in the realms of personal loans and credit card lending. Cautioning about this trend, banking and finance experts have also pointed out several aspects contributing to the evolving credit landscape.
In an earlier conversation with CNBC-TV18, Saswata Guha, Senior Director, Fitch Ratings, said that increasing risk in unsecured retail lending, pressure on margins due to funding costs, rising demand for personal loans, challenges in tracking the end use of funds for unsecured loans, indirect exposure to banks via the NBFC route, and the relatively higher ticket size of bank loans compared to NBFCs are the key concerns.
AM Karthik, Vice President, ICRA, also echoed these concerns about personal loans, citing substantially higher write-offs, the expectation of 4-6 percent losses, higher credit costs, and a rapid growth rate in disbursements.
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Jayaram Sridharan, Managing Director, Piramal Capital and Housing Finance, even pointed out a looming credit cycle, specifically referring to unsecured loans, particularly personal loans. While speaking at the CNBCTV-18 Banking Summit in August, Sridharan said that secured lending risks appear to be subsiding but unsecured lending, represented by personal loans and credit cards, seems to be undergoing more complex dynamics. Sridharan highlighted that data indicates a downward trend in secured lending risk but noted a fluctuating pattern in the case of personal loans and credit card lending.
