UNSECURED RETAIL LENDING IN INDIA + CAPTURING EMERGING TRENDS

Abstract: In recent times, RBI has been vocal about the high growth rate of unsecured retail credit in India as compared to the overall credit growth in the country. The RBI has termed the unsecured retail credit an outlier segment" as far as its growth rate is concerned and has drawn the attention of banks and NBFCs in this regard. As part of regulatory intervention, RBI has also increased the risk weights associated with unsecured credit exposure of banks and NBFCs. Post this development, the banking fraternity has been divided in their understanding of the ground realities. On one hand, there is a school of thought which feels that the recent surges in the unsecured retail lending in India is backed by solid macros. Whereas, others feel that the more than expected upsurge is a sign of incipient stress and might pose systemic risk, if not dealt with an iron hand.

- Abhijit De

Against this backdrop, this article delves upon the unsecured retail lending landscape in India. It tries to inform the reader about what constitutes unsecured lending, the various products and the size of this market. It also touches upon the apprehensions of RBI regarding the high credit growth in general. A discussion is made regarding the following 4 key concern areas of RBI viz. Sustainability of Growth, Unsurious Pricing of loans by NBFC-MFIls, Over-reliance on Analytics and increasing interconnectedness of Bank NBFC linkages.

Furthermore, in trying to capture the emerging trends in the unsecured retail banking space, the article explores the evolution of digital finance and the contribution of fin-techs in the recent lending binge. Besides, it also underscores the role of embedded credit products in developing an ecosystem for providing appropriate and timely credit delivery. The discussion revolves around the rising culture of credit driven consumption among the young population of India the digital natives) and its impact on the growth of unsecured retail credit market in India.

Introduction:

Back in August 2023, the Reserve Bank of India (RBI) Governor Shri Shaktikanta Das during his interaction with the heads of major commercial banks and large NBFCs, flagged the issue of high growth in certain segments of consumer credit and an increase in dependency of NBFCs on bank borrowings. The same was followed by the November 16 notification of RBI wherein the Risk Weights (RW) on consumer credit exposure of commercial banks was enhanced by 25 % (from 100% to 125%). However, Housing Loan, Education Loans, Vehicle Loans and Loans secured by Gold and Gold Jewellery were kept out of the ambit of this enhanced RW. Risk Weights on Credit Card receivables of SCB's, which till now attracted a RW of 125%, were also enhanced to 150%.