Rising Concerns Over Unsecured Loans in Bank Portfolios, Know whole chaos here!
In recent times, bank portfolios have been lending more money to non-banking finance companies (NBFCs), with the amount climbing from Rs 7.75 lakh crore in March 2021 to Rs 9.23 lakh crore by September 2022. The RBI’s Centre for Advanced Financial Research and Learning (CAFRAL) has raised concerns about this trend of unsecured loans. There’s worry about the increase in bank funding for NBFCs, which could lead to potential financial problems down the line.
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Now that RBI is tightening screws on unsecured loans, PhonePe is entering the marketing to sell personal loans. pic.twitter.com/NFPvkORCPj
— Arvind Datta (@datta_arvind) November 27, 2023
Unsecured Loans Under Stress
Interestingly, while banks point fingers at non-banking finance companies, especially those operating digital lending apps, they themselves are sitting on over Rs 93,240 crore of unsecured loans that are causing some trouble. These loans fall into a category called ‘special mention accounts’ (SMA). These accounts represent about seven percent of their total unsecured loans of Rs 13.32 lakh crore.
Understanding Special Mention Accounts
The SMA categories—SMA-0, SMA-1, and SMA-2—show different levels of stress in loan repayments. For example:
– SMA-0: No overdue payment, but signs of potential stress.
– SMA-1: Payment overdue between 31-60 days.
– SMA-2: Payment overdue between 61-90 days.
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Rising Concerns and Impact
The worry amplifies when we look at the numbers. Public sector banks have a higher percentage of unsecured personal advances falling into these stress categories compared to private banks. As of March 31, 2023, around 7 percent of banks’ unsecured retail loans are categorised as SMA-0, 1, or 2.
Impact on Different Lenders
An assessment by Care Ratings suggests that if these unsecured personal loans turn bad, fintech NBFCs would bear the most impact, followed by private sector banks, public sector banks, and other NBFCs. This emphasises the need for better risk management, particularly for fintech NBFCs, to navigate these challenges effectively.
Changing RBI Measures
The RBI has taken steps to discourage aggressive lending in certain segments. They increased the risk weights on bank exposure to consumer credit, credit card receivables, and NBFCs by 25 percent, aiming to control this lending trend.
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What’s Driving the Loan Surge?
The surge in demand for unsecured personal loans can be attributed to various factors, including changes in demographics, increased purchasing power, the rise of fintechs, easy access to the internet and digital payment systems, and better credit information availability. This tech-finance fusion has made personal loans more accessible, contributing to their growth in the market.
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In essence, while banks are pointing fingers at NBFCs for the rise in stressed loans, they’re also holding a significant portion of such loans themselves. It’s a complex situation that demands careful management and measures to prevent potential financial instability.
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