RBI Flags Sharp Increase in Delinquencies, Borrower Indebtedness in Consumer Credit
Moneylife Digital Team 31 December 2024
Reserve Bank of India (RBI) has flagged increased stress in the microfinance sector, with rising delinquencies across all types of lenders and ticket sizes. While delinquency levels in consumer credit remained stable for banks and non-banking financial companies (NBFCs), rising impairment can be seen in the unsecured retail loan portfolios, RBI says in its Financial Stability Report (FSR).
 
According to the FSR, nearly half of the borrowers availing credit cards and personal loans have other live retail loans outstanding which are often high-ticket loans such as housing and/or vehicle loans. "Given that a default in any loan category results in other loans of the same borrower being treated as non-performing by the lending financial institution, these larger and secured loans are at risk of delinquency from slippages in relatively smaller personal loans."
 
 
"First default is mostly observed in unsecured advances among the borrowers at risk of default (i.e., advances in SMA category), risk of delinquency is trending high amongst borrowers who in addition to a personal loan or credit card outstanding have availed other retail loans," RBI says.
 
According to the report, 11% of the borrowers originating a personal loan under Rs50,000 had an overdue personal loan and over 60% of them had availed more than three loans during FY24-25 so far.
 
Moreover, the FSR says nearly three-fifths of customers who have availed personal loan in the second quarter (Q2) of FY24-25 had more than three live loans at the time of origination.
 
Lenders are, nevertheless, exercising prudence as the shares of below prime customers across lender and product types have been marginally lower compared to a year ago. 
 
The decomposition of personal loans by income categories showed that after the high growth phase during FY20-21 to FY22-23, loan growth has moderated across all income categories between September 2023 and September 2024, with sharper deceleration in the group with less than Rs5 lakh annual income. During the same period, the above Rs15 lakh income category recorded the highest growth. 
 
 
In terms of outstanding loans, the Rs5 lakh - Rs15 lakh income category had the largest share as at end-September 2024.
 
Unsecured personal loans dominated borrowings by borrowers with less than Rs5 lakh income, higher income borrowers availed more secured loans, including housing loans, the FSR shows.
 
 
According to the report, the Indian banking system has remained resilient with robust capital buffers, strong operational performance, and declining asset impairment. "Macro stress tests indicate that banks' aggregate capital would remain above the regulatory minimum even under adverse scenarios. The NBFC sector witnessed robust credit growth while maintaining a strong balance sheet and profitability. In terms of bilateral exposures, interconnectedness among financial sector entities continued to rise. Mutual funds remain the largest fund providers in the financial system, whereas NBFCs are the largest receivers of funds."
 
"The medium-term outlook, however, remains challenging, with downside risks from possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness. Stretched asset valuations, fragilities in the less regulated non-bank financial intermediaries, and threats from new and emerging technologies also add to the evolving uncertain outlook," RBI says.
 
The stress test results reveal that capital levels of the banking system and of the NBFC sector will remain well above the regulatory minimum even under adverse stress scenarios, it added.
 
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