Boom in risky loans may spur curbs on unsecured lending

While risk weights are likely to increase, leading to more capital consumption, RBI will not raise it equally for all categories of unsecured loans, they said. The higher the perceived risk, the greater the risk weight assigned to a particular loan category.

Under the current norms, unsecured segments like consumer loans and credit card receivables attract 100% and 125% risk weights, respectively. In September 2019, RBI reduced the risk weight on personal loans by 25 percentage points.

Analysts said while banks, especially the private ones, have been pushing personal loans and other forms of unsecured credit, changes by RBI if it happens, would not have a significant impact.

“Personal loans have substantially grown, but so has our ability to underwrite them better, and while RBI might increase risk weights by 10 percentage points or more, we are not indiscriminate in unsecured lending," said a senior banker at a large public sector bank. An emailed query to an RBI spokesperson remained unanswered.

A private sector banker said he does not see a challenge in the unsecured loan space as banks are cautiously growing. He said there is demand for such consumption loans, and banks are just catering to that demand at the right price.

Personal loans comprised 27% of all retail loans in April, up from 25% two years ago, showed data from RBI. Credit bureau TransUnion Cibil showed in a report in April that vintage delinquency—the percentage of loan accounts where repayments have ever been delayed by over 30 days in the first six months—in personal loans was higher in the December quarter of 2022 than the pre-pandemic period.

Analysts tracking the sector are watching the growth of unsecured credit books. Goldman Sachs said in a note on 14 June that it has gathered feedback from the industry on the latest portfolio behaviour and found repayment delays of over 30 days trending upwards in small-ticket personal loans. That apart, the share of below-prime customers has also inched higher.

The Goldman Sachs note pointed out that the share of incremental unsecured loans in the total loan book has increased for some banks between FY22 and FY23. While HDFC Bank has seen it increase from 14% to 18%, ICICI Bank saw it go up from 17% to 24%, and Axis Bank saw it increase from 8% to 18% in the same period.

That said, analysts believe that the impact of an increase in risk weights in unsecured loan categories would certainly be manageable.

“Assuming a 25% increase in risk weights (personal loans at 125% and credit cards at 150%), we note that impact on common equity tier 1 (CET-1) levels is negligible," analysts at Macquarie said in a note on 26 June.

According to Macquarie’s calculations, CET-1 ratios will decline by 10-60 basis points (bps) across top banks, and despite this, capital levels would remain well above the regulatory limits.

Others believe that the situation could come to a head only if there are massive job losses, especially in the information technology sector.

“About two-thirds of total personal loans in the banking system are to employees in the financial sector or the IT sector, and unless you see a massive job loss in these sectors or a drastic correction in salaries, there is unlikely to be an asset quality challenge," said Parag Jariwala, director of investments, WhiteOak Capital.

Jariwala said there is not much to worry about unsecured loans at present, but as the proportion of these loans in the system goes up, one must be watchful as it increases risk. “RBI might be thinking that as the share of unsecured loans in aggregate loans increase, it would be prudent to have more safeguards and send a signal to lenders to be aware of the risks," he said.