Rising Stress in Microfinance and Unsecured Loans
The Reserve Bank of India (RBI) has raised concerns about the growing stress in unsecured loans, warning of its potential spillover to larger secured loans. According to the RBI’s Financial Stability Report (FSR) for the first half of 2024-25, the share of stressed microfinance assets saw a significant rise, with loans overdue between 31 and 180 days doubling from 2.15% in March to 4.3% in September. Unsecured loans such as credit card receivables and education loans registered bad loan ratios of 2.2% and 2.7%, respectively, higher than secured loans like vehicle loans (1.4%) and mortgages (1%).
The central bank emphasized the risk posed by borrowers who simultaneously hold unsecured and high-ticket secured loans, including housing and auto loans. Defaults in unsecured loans often lead to other loans being classified as non-performing, exacerbating the problem. Nearly half of the borrowers with credit card and personal loans also have other outstanding retail loans, heightening the risk of broader financial instability.
Challenges in Asset Quality Management
The Reserve Bank of India highlighted that asset quality in retail loans has remained largely stable, except for a marginal uptick in credit card receivables. However, the increasing trend of defaults among borrowers with multiple loans warrants closer scrutiny. Notably, 11% of personal loan borrowers with loans under ₹50,000 had overdue accounts, and over 60% had taken more than three loans during 2024-25.
Financial analysts have suggested proactive measures, such as quarterly credit bureau checks to identify delinquent borrowers. However, these steps are resource-intensive and unlikely to be widely adopted without regulatory mandates. The central bank also noted that private banks’ rising write-offs of unsecured loans might be masking deteriorating asset quality and relaxed lending standards.
Systemic Stress and Regulatory Vigilance
The report also highlighted systemic stress among large borrowers, despite an overall improvement in their asset quality. While the gross non-performing asset (GNPA) ratio for large borrowers dropped from 4.5% in March 2023 to 2.4% in September 2024, SMA-1 and SMA-2 loans—indicating early signs of repayment difficulties—rose sharply by 101% and 67%, respectively, between June and September 2024. Public sector banks experienced a notable increase in SMA-2 loans, signaling the need for heightened vigilance.
The Reserve Bank of India cautioned that stress among small borrowers and microfinance clients remains significant, particularly for those with multiple loans or higher outstanding balances. With credit growth in segments like credit cards outpacing other retail loans, the regulator has called for careful monitoring of this high-risk category.
In response, lenders have adopted more prudent practices, including tighter credit standards for below-prime customers. However, the central bank’s findings underscore the importance of ongoing regulatory oversight to prevent further deterioration in asset quality and maintain financial stability.
