After flagging risks associated with a sharp jump in unsecured loans, the Reserve Bank of India (RBI) has reportedly asked banks to be vigilant on small-ticket personal loans, which have lately seen a spike, particularly from low-income consumers.

A Reuters report on Thursday said the banking regulator may also tighten rules to avoid a rise in defaults.

The growth of such micro-loans was highlighted by RBI governor Shaktikanta Das recently.

He said certain components of personal loans are recording very high growth, with the apex bank closely monitoring them 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 interest,” he said.

The RBI has been monitoring the jump in credit card outstanding along with the growth of personal loans.

The possibility of the apex bank increasing the risk weights on such loans to discourage their growth at breakneck speed cannot be ruled out.

Unsecured retail credit has grown 23 per cent in the last two years against an overall credit growth of 12-14 per cent in the system, RBI deputy governor J. Swaminathan said.

He went on to add that banks, NBFCs and fintech firms are expected to take appropriate internal controls and if that is not done, the RBI will “examine” the aspect.

According to the Reuters report, the RBI is worried about small personal loans, particularly of those up to Rs 10,000 taken for three to four months, largely for “lifestyle” spending.

According to credit bureau firm CRIF Highmark, defaults for loans under Rs 50,000
stood at 8.1 per cent as of June 2023.

Recently, UBS Securities also cautioned against the risk of a rise in defaults of unsecured loans and the possibility of RBI action.

``We see increasing default risks in retail unsecured loans of banks, which is likely to push up their credit losses by 50-200 basis points. We think the risk of regulatory tightening is high,” it had said while turning neutral on the Indian banking sector.

According to data from CRIF and banks, the proportion of unsecured loans such as personal loans and credit cards is little over 8 per cent (annualised) as of the quarter ended June 30, 2023, and it comes between 8.5 per cent and 12 per cent for some of the big private secor banks.