Stress in unsecured loans may spill over, warns RBI

Individuals defaulting on small loans risk getting larger secured loans tagged NPAs

- Shayan Ghosh

Nearly a year after clamping down on the exuberance in unsecured loans, India's central bank has expressed concern about the stress in such loans spilling over to larger and secured loans. Reason: many borrowers of small, collateral-free loans also have housing and vehicle 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.

A default in any loan category typically prompts a lender to treat 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.