Mumbai: Nearly a year after clamping down on exuberance in unsecured loans, India’s central bank has expressed concern about the stress in such loans spilling over to larger, secured loans. Reason: many borrowers of small, collateral-free loans have also availed housing and auto loans.
“Nearly half of the borrowers availing credit card and personal loans have another live retail loan outstanding, which are often high-ticket loans (housing and/or vehicle loan)," the Reserve Bank of India (RBI) said in its half-yearly financial stability report (FSR) released on Monday.
The concern seems to stem from the fact that a default in any loan category leads to lenders treating other loans to the same borrower as non-performing. So, defaults in unsecured loans could turn larger and secured loans bad.
To be sure, unsecured loans such as credit card receivables and education loans have higher bad loan ratios of 2.2% and 2.7%, respectively, than other retail loans, according to RBI.
On the other hand, vehicle loans have a bad loan ratio of 1.4%. And mortgages (home loans), which comprise 48% of all retail loans, have the lowest bad loan ratio of 1%. Bad loan ratio is gross non-performing assets (GNPAs) as a share of total loans outstanding.
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“First default is mostly observed in unsecured advances; among the borrowers at risk of default (advances in SMA category), risk of delinquency is trending high among borrowers who in addition to a personal loan or credit card outstanding have availed other retail loans," it said.
SMA refers to special mention account. Banks classify borrowers into SMAs based on delays in repayment. SMA-0 loans are where the repayment overdue is between one and 30 days; SMA-1 between 31 and 60 days; and SMA-2 between 61 and 90 days. After 90 days of being overdue, an asset turns into an NPA.
According to an analyst tracking financial services, under current norms, when a borrower defaults on a loan, the lender would classify all other loans it has given to the same individual as bad. However, this would not apply in case the first default and the other loans are with different lenders.
“As a proactive measure, lenders could start doing a bureau check of their retail loans on a quarterly basis and raise provisions on loans where the borrower has defaulted elsewhere," the analyst said, requesting anonymity.
The analyst added that this would give a truer picture of asset quality, even as the cost of engaging in this exercise would be expensive, and is unlikely to be done in the absence of a regulatory push.
The RBI said on Monday that the GNPA ratio of unsecured loans was marginally higher at 1.7% as on 30 September. The comparable figure was 1.5% on 31 March.
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However, it said that the sharp rise in write-offs of such loans, especially among private sector banks, could be “partly masking worsening asset quality in this segment and dilution in underwriting standards".
On multiple loans availed by the same retail borrower, RBI said that 11% of the borrowers originating a personal loan under ₹50,000 had an overdue personal loan, and more than 60% of them had availed more than three loans so far in 2024-25.
“Lenders are, nevertheless, exercising prudence as the shares of below-prime customers across lenders and product types have been marginally lower when compared to a year ago," it said.
Lenders categorize borrowers based on their credit scores and those at the top of the pyramid are termed super-prime while those a notch below are called prime. The lower the credit score, the higher the probability of default.
According to RBI, asset quality in retail loans remained largely stable, except for a marginal uptick in credit card receivables across bank groups, which also saw the highest credit growth among all retail loan segments and “may require careful monitoring".
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Signs of stress have also started to appear in small loans.
Per RBI’s report, during the first six months of 2024-25, the share of stressed microfinance assets increased, with loans where repayments are overdue between 31 and 180 days rising from 2.15% in March to 4.3% in September.
Moreover, stress remained high among borrowers who had taken loans from multiple lenders and those with higher outstanding loans.
For large borrowers such as companies, the regulator pointed out that even as the asset quality of loans improved—bad loan ratio falling from 4.5% in March 2023 to 2.4% in September 2024—incipient stress or SMA-1 and SMA-2 loans have risen sequentially in September.
The SMA-1 and SMA-2 loans of large borrowers have risen 101% and 67%, respectively, between June and September.
“Furthermore, the SMA-2 ratio for large borrowers increased significantly for public sector banks in September from a year ago, warranting close monitoring," it said.
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