Indian banks face increased risk from rising unsecured loans and NBFC exposure

The lending landscape in India is witnessing a significant shift as banks’ exposure to Non-Banking Financial Companies (NBFCs) has escalated sharply, with loan amounts surging from ₹7.75 lakh crore in March 2021 to ₹9.23 lakh crore by September 2022. This rise has raised concerns about systemic risks, as highlighted by the Centre for Advanced Financial Research and Learning (CAFRAL).

Banks are currently grappling with over ₹93,240 crore in unsecured loans that are under stress or overdue within Special Mention Accounts (SMAs), with public sector banks showing higher SMA rates than their private counterparts as of March 31, 2023. The Reserve Bank of India (RBI) classifies stressed accounts into three categories: SMA-0 indicates stress without exceeding 30 days overdue, SMA-1 accounts are 31 to 60 days overdue, and SMA-2 accounts are 61 to 90 days overdue.

In the realm of personal lending, unsecured personal loans have outpaced the growth of general personal loans since March 2017. These now constitute one-third of banks’ total personal loan credit, which stands at ₹40.9 lakh crore. Within this segment, NBFCs account for a substantial ₹10.9 lakh crore.

On November 16, the RBI responded to these developments by increasing risk weights on exposures towards consumer credit and NBFCs by 25 percentage points. This move came as credit card receivables saw a year-on-year increase of 29.9%, reaching ₹2.17 lakh crore as of September.

The demand for unsecured personal loans has been driven by demographic shifts, economic formalization, and the evolution of fintech, including the impact of India stack’s influence on digital identity verification. Care Ratings has identified fintech NBFCs as the most vulnerable to downturns in the unsecured loan segment, followed by private and public sector banks based on a recent poll assessing potential impacts.

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