Looming risk? Personal loan credit by banks, NBFCs nearly triples in 6 yrs

During the fiscal years 2017 to 2023, personal loan credit experienced robust growth of almost 1.5 times the overall credit growth observed in both Banks and Non-Banking Financial Companies (NBFCs).

Personal loan credit by banks and NBFCs has almost tripled in the past six years to Rs 51.7 trillion,  forming 30.3 per cent of the overall loan book as of March 31, 2023, as against Rs 18.6 trillion or 21.5% of the overall loan book as on March 31, 2017, said a report by rating agency CareEdge.

Overall Credit Market Size for Personal Loans (Credit of Banks+ NBFCs): CareEdge

The rate of growth of personal loan books (which typically signifies consumption loans) is almost double of the rest of the banking sector lending (business lending)

During the fiscal years 2017 to 2023, personal loan credit grew almost 1.5 times the overall credit growth observed in both Banks and Non-Banking Financial Companies (NBFCs). 

Unsecured Personal Loan Growth Outpacing Overall Retail Loan Growth: 

Within personal credit (which typically signifies consumption loans), unsecured personal loans outpaced the overall expansion of the personal loan book and constitute nearly one-third of the total personal loan segment loans at Rs 41 trillion as of March 31, 2023, noted CareEdge.

This trend has been further facilitated by the advent of Fintech and Digital channels, contributing to increased origination volumes.

Loans less than Rs 1 lakh constitute 85% of loans in FY23

The emphasis on smaller ticket-size loans by NBFCs has been a significant driver of volume growth in the unsecured personal loan segment.  Loans with a ticket size below Rs 1 lakh constituted over 85% of loan originations by volume in FY23. Loans with ticket size below Rs. 50,000 hold the majority share in origination volume, witnessing a more than two-fold increase in origination value in this segment over the last two fiscals that ended March 2023.

What led to this increase in demand for personal loans? 

"Several factors have contributed to the substantial increase in the demand for unsecured personal loans, encompassing demographic shifts, the formalization of the economy, elevated purchasing power, the evolution and prominence of FinTechs, widespread access to the Internet/broadband and feature phones, the adoption of digital payment systems, the influence of India stack and information collateral, and broader coverage of credit bureaus, etc," said the CreditEdge report. 

The transformation in consumer behaviour has emerged as a pivotal driver behind the upsurge in loan unsecured personal loan demand, particularly within consumption-driven growth patterns. 

Notably, a perceptible shift in mindset is particularly evident among the younger demographic, who now embraces the idea of borrowing for consumption, contrasting significantly with perspectives from the past decade. "The significant evolution in loan processes, greatly influenced by the digital infrastructure, has significantly enhanced flexibility and convenience for consumers, especially the younger demographic. This evolution stands as a key facilitator in the consumption-driven growth witnessed today," the report added. 

Consumption-driven growth resulted in household savings dipping to 47-year low

However, this consumption-driven growth has also led to an increase in overall household financial liabilities. As per the latest report on household savings by RBI, Household savings in India hit a 47-year low at 5.1% of GDP in FY23. This was mainly on account of the increase in household financial liabilities indicating that people are becoming more dependent on borrowing to cover their consumption demands.

 Household Savings in India as a % of GDP

The decline in household savings was witnessed especially post FY21 with pent-up demand post covid leading to higher consumption. Further borrowings would have gone up probably as a result of the difficulties brought on by rising inflation. 

" While high household debt need not necessarily be a worry if there is adequate income to back, but a rising share of loans by people with weak earning profiles could lead to loan repayment problems in the unsecured retail lending segment which has been highlighted by RBI as well," said the report. 

Impact of latest RBI move to deter growth of personal loans 

Strong signals from the Reserve Bank of India (RBI) could act as a deterrent to the growth of unsecured personal loans, potentially causing a partial slowdown in the immediate to near term. The impact on NBFCs is expected to be twofold, according to CareEdge: 

1. RBI's directive to increase risk weights by 25% for advances to AAA to A-rated Non-Banking Financial Companies (NBFCs) is likely to prompt banks to adjust loan pricing.
2. Additionally, RBI has raised the risk weights on NBFCs' unsecured personal loan exposure by 25%. This adjustment is expected to impact the capital buffers of NBFCs. Consequently, there may be a slowdown in lending.

"Although the asset quality has remained stable, there is a need for vigilant monitoring, particularly on small ticket size loans; furthermore, given that each player focuses on specific sub-segments, this may lead to divergent credit cost trends in the unsecured retail portfolio of these players," said the report.