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In light of recent concerns raised by the Reserve Bank of India (RBI) regarding the potential risks associated with a significant increase in unsecured loans, there is an emerging focus on heightened vigilance concerning small-ticket personal loans, especially from low-income consumers. A recent Reuters report suggests that the RBI may also consider implementing stricter regulations to mitigate the rising trend in loan defaults.

RBI Governor Shaktikanta Das recently drew attention to the rapid growth of micro-loans, particularly specific segments of personal loans that are experiencing substantial expansion. The central bank is closely monitoring these segments for any early signs of financial stress.

Governor Das advised both banks and Non-Banking Financial Companies (NBFCs) to reinforce their internal risk assessment mechanisms, address any identified risks, and establish suitable safeguards to protect their interests.

The RBI has been closely monitoring the increase in outstanding credit card balances alongside the growth of personal loans. There is a possibility that the RBI may increase the risk weighting on these loans to discourage their rapid growth.

Over the past two years, unsecured retail credit has surged by 23%, significantly outpacing the overall credit growth of 12-14% within the financial system, according to RBI Deputy Governor J. Swaminathan. He emphasized the need for banks, NBFCs, and fintech companies to implement effective internal controls. Failing to do so may result in the RBI conducting a thorough examination of the situation.

One particular area of concern for the RBI is small personal loans, particularly those valued at up to Rs 10,000 and taken for short periods, often for discretionary “lifestyle” spending. Credit bureau firm CRIF Highmark reported an 8.1% default rate for loans under Rs 50,000 as of June 2023.

UBS Securities has also voiced concerns about the rising risk of defaults in unsecured loans and the potential for regulatory actions by the RBI. They anticipate that the credit losses of banks may increase by 50-200 basis points due to higher default risks.

Data from CRIF and banks indicates that unsecured loans, including personal loans and credit cards, constitute a little over 8% (annualized) of the financial landscape as of the quarter ending June 30, 2023, with some major private sector banks reporting figures ranging between 8.5% and 12%.

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