RBI Raises Red Flags on Unsecured Loans, Private Credit Risks

The Reserve Bank of India (RBI) has expressed concerns about the rising delinquency and leverage in unsecured loans, urging enhanced vigilance despite a slowdown in overall credit growth. In its annual report, Trends and Progress of Banking in India 2023-24, the RBI also highlighted the need to closely monitor the relationship between lenders and private credit firms.

Unsecured Loans on the Rise

The share of unsecured loans in total credit from commercial banks has increased steadily over the years, reaching 25.5% in March 2023 before slightly dropping to 25.3% by March 2024. In response, the RBI introduced stricter regulations in November 2024, including higher risk weights for unsecured loans and requiring banks and non-banking financial companies (NBFCs) to set exposure limits. However, some entities have set excessively high limits, which the RBI urges should be monitored closely.

Concerns Over Top-Up Loans

The RBI also raised concerns about top-up loans, which are often granted with minimal checks and relaxed standards. It found instances where guidelines on loan-to-value ratios and risk monitoring were not properly followed. The central bank warned that such practices could lead to higher risks, especially if the value of collateral falls. Banks were instructed to treat top-up loans as unsecured, and the RBI may impose further restrictions if necessary.

Scrutiny of Gold Loans

The RBI also flagged gold loans, noting several irregularities in loans against gold ornaments and jewellery. Lenders are urged to closely oversee their gold loan portfolios and improve monitoring of outsourced services.

Private Credit and Systemic Risks

The RBI emphasised the need for a deeper look at the private credit market, pointing out the potential systemic risks arising from the links between private credit firms, banks, and NBFCs. There is a concern that these connections could lead to regulatory loopholes and affect overall financial stability.

Retail Loan Performance

In the broader retail loan market, the gross non-performing assets (NPAs) stood at 1.2% as of September 2024, the lowest among all sectors. However, the agriculture sector had the highest NPA ratio at 6.2%. Education loans showed improvement, with the GNPA ratio decreasing from 5.8% in March 2023 to 2.7% by September 2024. Despite the improvement, education loans still have the highest NPA levels among retail segments, followed by credit card debts and consumer durables.

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