4 min readMumbaiNov 27, 2023 06:15 AM IST
First published on: Nov 27, 2023 at 06:15 AM IST
While banks are blaming non-banking finance companies, especially fintechs which operate digital lending apps, for the sharp rise in unsecured loans, they themselves are sitting on over Rs 93,240 crore of unsecured loans which are in the special mention accounts (SMA) category, or loans which are showing signs of stress or repayment is overdue.
These special mention accounts are almost seven per cent of their total unsecured loan outstanding of Rs 13.32 lakh crore.
Special mention account categories (SMA)—SMA-0, SMA-1 and SMA-2 — of public sector banks stood higher with an SMA of 9.9 per cent in unsecured personal advances as compared to 4.0 per cent for private banks for unsecured retail loans category as on March 31, 2023. At an aggregate level, banks have 7 per cent of their unsecured retail loans in the SMA-0, 1 and 2 categories, according to Care Ratings.
Even the SMA share of secured retail advances also lies in the range of 7 per cent as of March 31, 2023, it said.
According to the RBI classification, in the SMA-0 category, principal or interest payment is not overdue for more than 30 days but account is showing signs of incipient stress. In SMA-1, principal or interest payment is overdue between 31-60 days and in the case of SMA-2, principal or interest payment overdue between 61-90 days. If the repayment is delayed by more than 90 days, it’s classified as a non-performing asset (NPA).
The growth of unsecured personal loans (including credit card receivables, consumer durable loans and other personal loans) in banks from March 2017 to March 2023 stood at 21 per cent outpacing the personal loan growth which exhibited a growth of 19 per cent during the same period.
Unsecured personal loans account for almost one-third of overall bank’s personal loan credit of Rs. 40.9 lakh crore as of March 31, 2023 and NBFCs account for Rs 10.9 lakh crore of personal loans, as per a Care report. Care Ratings, which conducted a poll assessing the potential impact on various lender categories in the event of unsecured personal loans turning sour, said fintech NBFCs emerge as the most susceptible, with private sector banks, public sector banks and other NBFCs following in decreasing order of potential impact. This underscores the need for a vigilant approach to risk management, especially for fintech NBFCs, in navigating the challenges associated with the unsecured personal loan segment.
Moreover, banks have been increasing their loan exposure to NBFCs. It has gone up from Rs 7.75 lakh crore in March 2021 to Rs 9.23 lakh crore by September 2022. The Centre for Advanced Financial Research and Learning (CAFRAL), set up by the RBI, had recently raised concern over the rise in the bank financing for NBFCs. “This raises concerns about systemic contagion and underscores the need for tighter preventive measures to mitigate potential systemic fallout,” CAFRAL, a not-for-profit organisation, said in its India Finance Report earlier this month.
“If NBFCs are being blamed for the rise in their stressed loan portfolio, banks which fund them are also responsible for it,” said a financial sector source.
Unsecured personal loans are types of loans that do not require any collateral from borrowers to avail them. Hundreds of legal and illegal digital lending apps are in the forefront of extending unsecured loans.
On November 16, the RBI increased the risk weights on the exposure of banks towards consumer credit, credit card receivables and NBFCs by 25 per cent up to 150 per cent. The move is aimed at discouraging lenders from aggressively lending to these segments of loans. The central bank increased the risk weights on credit card receivables by 25 percentage points to 150 per cent and 125 per cent for commercial banks and NBFCs respectively. Credit card outstanding of banks had shot up by 29.9 per cent on a year-on-year basis to Rs 2.17 lakh crore as of September 2023.
Several factors have contributed to the substantial increase in the demand for unsecured personal loans, encompassing demographic shifts, the formalization of the economy, elevated purchasing power, the evolution and prominence of fintechs, widespread access to the Internet/broadband and feature phones, the adoption of digital payment systems, the influence of India stack and information collateral, and broader coverage of credit bureaus, etc.
The convergence of technology and finance has reshaped the lending landscape in India, making personal loans more accessible and convenient for a larger segment of the population, thereby contributing to the growth of the personal loan market, Care said.
The growth of unsecured personal loans (including credit card receivables, consumer durable loans and other personal loans) in banks from March 2017 to March 2023 stood at 21 per cent outpacing the personal loan growth which exhibited a growth of 19 per cent during the same period. (Representational Image) 
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