In a revelation that spotlights the underbelly of the banking sector, it has come to light that banks, quick to blame non-banking finance companies (NBFCs) for the surge in unsecured loans, find themselves ensnared in a web of over Rs 93,240 crore of stressed unsecured loans. These loans, now residing in the precarious Special Mention Accounts (SMA) category, are sounding alarm bells, revealing signs of stress and overdue repayments.
Unveiling the Numbers:
– Unsecured loans in the SMA category account for nearly seven percent of the staggering total unsecured loan outstanding, reaching a monumental Rs 13.32 lakh crore.
– Delving into the sectoral breakdown, public sector banks exhibit a higher SMA of 9.9 percent in unsecured personal advances, in stark contrast to the 4.0 percent noted for private banks in the unsecured retail loans category as of March 31, 2023.
– An aggregate analysis conducted by Care Ratings divulges that the SMA-0, SMA-1, and SMA-2 categories collectively harbor seven percent of unsecured retail loans.
Navigating the Terrain:
– The surge in unsecured personal loans, comprising credit card receivables, consumer durable loans, and other personal loans, has witnessed a substantial 21 percent growth from March 2017 to March 2023. This outpaces the growth of personal loans, which stood at 19 percent during the same period.
– An intricate web of factors, including the rise of legal and illegal digital lending apps, has contributed to the substantial increase in the demand for unsecured personal loans.
Concerns and Responses:
– The Reserve Bank of India (RBI) has taken proactive measures, increasing risk weights on the exposure of banks towards consumer credit, credit card receivables, and NBFCs. This move is aimed at discouraging lenders from aggressively venturing into these segments of loans.
– Credit card outstanding for banks has surged by a notable 29.9 percent on a year-on-year basis to Rs 2.17 lakh crore as of September 2023.
Rising Exposure to NBFCs:
– Banks’ loan exposure to NBFCs has witnessed a significant uptick, escalating from Rs 7.75 lakh crore in March 2021 to a staggering Rs 9.23 lakh crore by September 2022.
– The Centre for Advanced Financial Research and Learning (CAFRAL), an institution set up by the RBI, has expressed concern over this surge in bank financing for NBFCs, citing potential systemic contagion.
Moving Forward:
– As the banking sector grapples with this financial conundrum, experts emphasize the urgent need for a vigilant approach to risk management. This is particularly crucial for fintech NBFCs, highlighting the challenges associated with the unsecured personal loan segment.
Banks and NBFCs alike are urged to adopt a proactive stance to navigate the intricacies of this financial landscape, ensuring stability and resilience in the face of evolving challenges.
