The RBI recently came up with its bi-annual Financial Stability Report (FSR) for the half-year ended March 2024. A combined study of the report with its earlier version for the half-year ended September 2023 sheds light on the context in which the RBI raised risk weights for unsecured lending by banks and NBFCs and its aftermath.

Earlier, in its FSR for the half-year ended September 2023, the RBI flagged signs of risk build-up in consumer credit, specifically the unsecured kind. The credit card receivables of Public Sector Banks (PSBs) saw a year-on-year (YoY) growth of a whopping 146.5 per cent as of September 2023 (See chart). Private Banks (PVBs) recorded a 29.2 per cent growth in credit card receivables and 37.6 per cent growth in other personal loans. All the Scheduled Commercial Banks (SCBs) together marked a 23.3 per cent and 23.8 per cent YoY growth in credit card receivables and other personal loans respectively.

Not all loans advanced were quality ones and so, vintage delinquency of personal loans reached 8.2 per cent, indicating a decline in credit underwriting standards. Vintage delinquency is the percentage of accounts that have become delinquent (90+ days past due) within twelve months of origination. As regards asset quality of credit card receivables, the gross NPA ratio at the system level stood at 2 per cent as of September 2023. Not something that would ring alarms bells. However, as far as PSBs are concerned, the GNPA ratio stood at 13.3 per cent (See chart).

The situation was so intense that 42.7 per cent of customers availing of consumption loans already had three live loans at the time of origination; 30.4 per cent of customers had availed more than three loans in the last six months, and 7.3 per cent of customers availing a personal loan below ₹50,000 had at least one overdue personal loan.

Further, bank lending to NBFCs increased at a CAGR of 26.3 per cent between June 2021 and June 2023, which is well above the 14.8 per cent CAGR recorded by overall bank credit. This is important because the share of unsecured loans in the AUM of NBFCs was well north of 30 per cent, with credit card receivables of NBFCs posting 22.6 per cent growth and other retail loans 33.6 per cent YoY as of September ‘23.

The situation made the RBI spring into action in November 2023, when it hiked the risk weights for unsecured lending by banks and bank credit to certain NBFCs by 25 per cent. The move brought about a slew of measures by banks — such as ICICI Bank refining credit parameters for personal loans, SBI and Axis Bank passing on the incremental cost of capital due to the higher risk weights to NBFCs and customers of personal loan products.

As a consequence, YoY growth in credit card receivables of PSBs fell sharply to 77.9 per cent as of March 2024, from monumental levels of 146.5 per cent (See chart). Other personal loans of PVBs have slowed down to 26.4 per cent YoY as of March 2024, from 37.6 per cent. At the system level, growth in other personal loans has moderated to 19.9 per cent from 23.8 per cent. On the asset quality front, the GNPA ratio with respect to credit card receivables has fallen by 200 bps for PSBs and 20 bps each for PVBs and at the system level (See chart).

Bank lending to NBFCs has declined to 9.4 per cent of total bank credit as of April 2024, down from its peak of 10 per cent in June 2023. Moreover, YoY growth in bank lending to NBFCs has also moderated, from 18.9 per cent in November 2023 to 14.6 per cent in April 2024. Also, NBFCs have considerably reduced their exposure to unsecured loans from a peak of 32.2 per cent to 29 per cent in November 2023, to 22 per cent in March 2024.

The RBI’s timely corrective measures seem to be working, having brought credit cards GNPA to 1.8 per cent. Total GNPA at the system level has also declined to comfortably low levels. System-level CRAR, too, is at a healthy 16.8 per cent. Overall, RBI’s proactive measures prove to be a positive for the long-term financial health of India’s banks and their investors.

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