Reserve Bank of India looking at banks' retail loan book more granularly

Sharp rise in unsecured loans in one year

The Reserve Bank of India (RBI) has started looking at the retail loan books of banks in a more granular way during the annual financial inspection for 2022–23 (FY23), three senior bankers told Business Standard.

After staying sluggish for a few years, bank credit growth picked up in the previous financial year, registering a growth rate of 15.5 per cent. Significantly, retail loans grew at a faster pace, particularly unsecured retail.

According to the latest RBI data, year-on-year (YoY) growth of retail loans was 19.4 per cent until April 21, 2023. Within retail, credit card outstanding grew by 29.7 per cent to cross the Rs 2 trillion mark for the first time. Other personal loan segments grew by 24 per cent to over Rs 11 trillion.

Three bank executives said the RBI had begun the audit of FY23 numbers as part of risk-based supervision. While the overall books of all banks are in better shape, RBI officials are looking into the granular details of retail books.

RBI Governor Shaktikanta Das has repeatedly cautioned banks in the past few months. “It has to be remembered that the seeds of vulnerability often get sown during good times when risks tend to get overlooked,” Das said in his foreword to the Financial Stability Report that was released in the last week of June.

On Tuesday, too, while interacting with the managing directors and chief executive officers of public and private sector banks, Das said banks need to be extra cautious and vigilant.

Bankers said the central bank indicated that lenders need to be watchful of unsecured loans and loans to non-banking financial companies (NBFCs). Bank loans to NBFCs grew by 29.2 per cent YoY until April 21 to Rs 13.45 trillion.

While there is strong growth in the retail segment, delinquencies are still limited, observed experts.

“The credit score has been playing a crucial role in the selection of borrowers for secured as well as unsecured credit,” said Ajit Velonie, senior director, CRISIL Ratings.

“The share of the prime category, that is, those with credit scores of 730 and above, has grown over the years. As a corollary, the share of below-prime (score below 730), above 50 per cent in 2020, declined to 49.8 per cent in 2022, and further to 46.9 per cent in 2023,” he added.

According to CRISIL Ratings, gross non-performing assets (GNPAs) in the retail segment are estimated to be 1.4 per cent in FY23, against 2 per cent in 2017-18.

GNPAs were lower than the 1.8 per cent registered in 2021-22.

“While the agency does not see any uptick in bad loans in any of the retail segments, there is a challenge for lenders from rising interest rates and inflation, especially in FY23. The latter eats into saving, impacts repayment capacity, and creates the need to monitor loan portfolios,” said Velonie.

Retail loans grew at a compound annual growth rate (CAGR) of 24.8 per cent from March 2021 through March 2023, nearly double the CAGR of 13.8 per cent for gross advances during the same period.

Retail loans formed around one-third of the total banking system’s gross advances.

The share of unsecured retail loans increased from 22.9 per cent to 25.2 per cent, and secured loans declined from 77.1 per cent to 74.8 per cent between March 2021 and March 2023.