The Reserve Bank of India (RBI) has recently issued directives to banks, urging them to strengthen their background verification processes before granting unsecured retail loans and credit cards.
These measures come as a response to the increasing risks associated with such loans, making it more challenging for individuals to secure personal and credit card loans.
Rising Risk Prompts RBI’s Cautionary Stance on Unsecured Lending
Recognizing the escalating risk of default, the RBI has cautioned banks about the potential hazards associated with unsecured loans.
With the surge in demand for credit cards and personal loans, particularly in the wake of the COVID-19 pandemic, the RBI aims to address the growing concerns and potentially curb the unsecured lending portfolio.
Rapid Increase in Personal Loans and Credit Card Debt Raises Alarm
Statistics reveal a significant increase in personal loan borrowers and credit card users in recent years.
In 2022, the number of personal loan borrowers rose from 78 million to 99 million, while credit card loans witnessed a 28% surge, reaching Rs 1.7 trillion compared to the previous Rs 1.3 trillion.
Mounting Unsecured Loan Amounts Raise Concerns
As of February 2023, personal loans have soared from Rs 33 trillion to Rs 40 trillion, marking a 20.4% increase.
The robust growth of unsecured credit, coupled with inflationary pressures and rising interest rates, has raised apprehensions among RBI officials.
Stricter Measures and Potential Risk Weight Increase
To mitigate the potential risks of default, the RBI has called for stricter scrutiny of unsecured loans.
Additionally, the RBI may consider raising the risk weight associated with unsecured loans, further emphasizing the need for cautious lending practices among banks.
These measures aim to ensure the stability of the financial sector in the face of inflationary pressures and rising interest rates.
