Growth in unsecured loan remains strong despite hike in risk weighting

Recently, the RBI reiterated its concern on the elevated unsecured lending portfolio of banks in its Bulletin

The growth of unsecured credit in the overall loan portfolio of Indian banks remains elevated even after the Reserve Bank of India’s (RBI’s) decision to increase the risk weighting on unsecured lending.

The recent data released by the RBI shows that credit card transaction value has surged to Rs 1.66 trillion in January 2024 from Rs 1.61 trillion in November 2023.

“The Indian credit card industry remains on a strong growth trajectory, notwithstanding the perceived issues in unsecured lending as well as the RBI’s risk-weight guidelines,” said a research note by CLSA.

The RBI had reiterated its concern on the elevated unsecured lending portfolio of banks in its bulletin.

“Banking and financial sector companies maintained strong growth in profitability on the back of the still burgeoning credit demand in the economy and lower provisioning costs. Banks’ unsecured loans grew despite the hit on capital due to an increase in risk weights,” the RBI noted.

In November 2023, the RBI announced an increase in the risk weighting on unsecured lending including personal loans and credit card loans. The RBI increased the risk weighting for such loans from 100 per cent to 125 per cent.

According to estimates of Kotak Institutional Equities (KIE) in the October-December quarter of FY24 (Q3 FY24), the share of unsecured loans was 9.3 per cent of the total lending business of the major banks in the country.

The share has increased from 9.2 per cent in Q2 FY24.

According to Emkay Global, the increased exposure to unsecured lending has led to a rise in slippages among banks like IndusInd Bank, Bandhan Bank, RBL Bank, and Yes Bank among others, and shadow banks like SBI Card.

 “Stress in unsecured retail loans, more so in the low-ticket and high-risk customer segment, is coming to the fore, justifying the RBI’s recent action towards increasing risk weights and containing runaway growth in such segments,” a research note by Emkay Global Financial Services said.

The overall loan growth of private sector banks in Q3 FY24 was 18.2 per cent year-on-year (Y-o-Y) as compared to a growth of 16.1 per cent in Q2 FY24.

The public sector banks saw 14.6 per cent growth in their loan book in Q3 FY24 as against a growth of 14 per cent in Q2 FY24.

During the post-Q3 earnings call, most of the leading lenders said they are focused on strengthening their secured lending portfolio in line with the RBI’s guidelines.