The Reserve Bank of India cautioned banks and NBFCs on Friday against high growth in the unsecured retail credit segment, and asked them to strengthen their internal risk mechanisms as the first line of defense to avoid future challenges.

“Certain components of personal loans are recording very high growth. These are being closely monitored by the RBI for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” said Governor Shaktikanta Das in his statement, adding that robust risk management and stronger underwriting standards are the “need of the hour”.

However, on a whole, the Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth, said the RBI, adding that credit growth is broad-based and backed by the strong fundamentals of financial institutions.

“GNPA figures for the banking sector for June look even better. NBFCs also are experiencing a similar situation. Our objective of saying this is that we have to be mindful of what can pose a challenge going forward, what can become a future risk,” said Das in the post-policy meet.

Unsecured credit growth

Deputy Governor Swaminathan J said that over the last couple of years, year-on-year growth in retail credit has been close to 30 per cent for most institutions, and 23 per cent on average for the sector.

“If you see that in the context of rest of credit growth, which is anywhere from 12 to 14 per cent, it looks to be an outlier. As a supervisor, it is our intention to inform the banks that is an outlier level of growth, so strengthen your internal surveillance mechanisms, so that any risk that may likely be building up is handled upfront rather than coming to grief at a later time,” he said, adding that lenders should grow their portfolios “sensibly”.

Both Das and Swaminathan termed banks and NBFCs as the “first line of defense” against this outlier growth, with Das saying that lenders need to keep their eyes, ears and nose open to “smell where the crisis is likely to come up” instead of being lulled into any kind of complacency.

Unsecured retail loans grew at a CAGR of 47 per cent from March 2021 to March 2023, led by digital and information-oriented small ticket lending, according to a recent report by TransUnion CIBIL.

This is the first instance of the central bank publicly expressing concern regarding the unprecedented pace of growth in unsecured retail credit, and asking lenders to be cautious on future growth. On its part, the RBI will continue to monitor the segment and will examine the need for a regulatory or macro prudential action if it sees that appropriate internal controls are not being built.

Swaminathan said the RBI also recognises that the ability to lend through digital mediums is higher in this segment in terms of the opportunity, ease and convenience that has brought in.