RBI’s higher risk weights for consumer loans compound woes for retail banks

As the saying goes, when it rains, it pours. Retail bankers have found themselves caught in a crossfire from multiple fronts. The surge in interest rates in the last 18 months has increased the burden on existing borrowers, while new borrowers are becoming increasingly scarce. The sustained inflationary pressures are already keeping borrowers away from making high-value purchases such as homes and cars. The lower capacity utilisation in the industry is also restricting growth in the corporate book. Finally, the RBI has made consumer loans, especially personal and credit cards, more expensive by increasing risk weights.

Suman Chowdhury, Chief Economist and Head of Research, at Acuité Ratings & Research, says the RBI’s measures for higher capital for unsecured loans address two major concerns: First, the higher capital requirement is expected to moderate the excessive growth of unsecured consumer loans. Second, it limits the spread of any such systemic risks in the banking sector on lending to NBFCs.

In fact, the RBI Governor Shaktikanta Das has been sounding the alarm over the high growth in unsecured loans particularly in the sub-Rs 50,000 category. In the post-2008 period, NBFCs with a substantial share of personal loans, such as CitiFinancial, Fullerton, Pragati, and many others, faced financial challenges, and some eventually folded up. In the last 5 years or so, it is only the consumer lending and more particularly the unsecured loans that are compensating the lower growth in the corporate side.

While banks have seen unsecured loans grow the fastest and also increase in terms of their share in the loan book, the data shows that the share of small-ticket personal loans is less than 1 per cent of the total retail loan book at an industry level. In fact, the smaller NBFCs and the new-age Fintech players are more exposed and not the banks.

Credit bureau TransUnion CIBIL Credit Market Indicator recently highlighted that while delinquencies on small-ticket personal loans may have a limited effect on the overall personal loan portfolio, it is crucial to closely monitor them. "This is particularly important because consumers might prioritise other financial obligations over personal loan payments, potentially serving as a broader indication of financial strain, "it states.

So how big is the personal loan and credit card portfolio for the big banks in the country?

The country's second-largest private bank, ICICI Bank, has witnessed substantial growth in personal loans, with a 40 per cent year-on-year increase in the September 2023 quarter and a 10 percent sequential growth. The credit card portfolio has grown by about 30 percent year-on-year and around 6.0 percent sequentially.

The share of these loans, however, is not big on the balance sheet. The personal loans and credit card portfolios constituted 9.4 percent and 3.9 percent of the overall loan book, respectively, in September this year.  However, within the retail portfolio, personal loans accounted for 17 percent, and credit cards for 7 percent.

Currently, the bank’s 54 percent of the loan book consists of retail loans. The bank claims that its presence in the smaller ticket size segment (less than Rs 50,000) is minimal.

In terms of growth rate, HDFC Bank has witnessed a 15 percent year-on-year growth rate in personal loans in the September quarter. The bank’s personal loan share is about 15 per cent of the retail book, and credit cards and consumer durable loans together account for about 8 per cent.

Axis Bank holds 12 per cent of its loans in personal loans, with credit cards constituting 7 per cent.

IndusInd Bank has a very low share in personal loans and credit cards, at 2 per cent and 3 per cent, respectively, as of September 2023. State Bank of India Chairman Dinesh Khara recently put analysts’ worries to rest by assuring that there are no concerns over the bank's unsecured loan portfolio, and the gross non-performing assets (NPAs) in this segment stand at just 0.69 percent.

Historically, a significant portion of personal loan sourcing for banks comes from existing salary account customers. In addition, the banks have established partnerships with external players like Amazon or Fintech players where customers are known to the bank, and transaction data is available with the partners.

S&P Global has said that the RBI's steps to curtail riskier bank lending to consumers will hit loan growth, and will squeeze the nonbank sector in particular. 

Virat Diwanji, Group President and Head of Consumer Banking at Kotak Mahindra Bank, says the RBI's move is likely to meet the desired objective of prudent unsecured lending and this can slow down the growth of unsecured lending over next 3 to 6 months. “This move will push lenders to go selective on credit in the unsecured space,” he adds.

Mahesh Shukla CEO & Founder PayMe says that if risk weightage on credit card and personal loans increases, banks may incur higher capital costs for these types of loans. "This could lead to increased costs of funds for NBFCs and fintechs that rely on bank funding for their lending activities. As banks pass on the higher costs to their borrowers, NBFCs and fintechs may experience a corresponding increase in the cost of borrowing from banks. Banks, responding to higher risk weightage, may become more risk-averse and adopt stricter lending standards,” says Shukla.

“This could result in tighter funding conditions for NBFCs and fintechs, making it more challenging for them to access credit from traditional banking sources. The increased perceived risk may lead banks to be more selective in choosing their lending partners,” he adds.

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