Private Banks Face Rising Stress in Unsecured Retail Loans As NPAs Climb

Private sector banks are seeing growing signs of stress in their unsecured retail loan portfolios, even as the overall pace of such lending has moderated in recent quarters, the Reserve Bank of India's Financial Stability Report for June shows.

According to the latest data, unsecured retail loans now constitute 25% of all retail loans and 8.3% of total gross advances, but their asset quality has deteriorated more sharply than the broader retail segment, the report said.

Gross non-performing asset ratio for unsecured retail loans has risen to 1.8% as of March 2025, compared to 1.2% for the overall retail portfolio.

The trend is especially noticeable among private sector banks, which have reported higher slippages and a larger share of fresh NPAs in this segment than their public sector peers.

Industry data shows that slippages in unsecured retail loans, such as personal loans and credit cards remain elevated for private banks.

Fresh slippage in this category now dominates the overall slippage in the retail loan segment, with private sector banks contributing a disproportionately high share.

Write-offs have also become a key tool for managing NPAs in these portfolios, further highlighting the underlying stress. Meanwhile, the special mention account (SMA) ratio, an early indicator of potential stress in the loan book, has edged higher led by mainly public sector banks.

This suggests that while private banks are currently bearing the brunt of asset quality issues in unsecured retail, public banks could also face pressure if stress continues to build.

In a positive development for borrowers, the share of floating rate loans has increased significantly. Among fourteen major banks, accounting for nearly 80% of the sector’s assets, floating rate loans now make up 75.7% of total gross advances, up from 72% two years ago.

In the retail category, the share has climbed from 60.2% to 65.1%, with nearly 90% of these linked to external benchmark lending rate. This shift means that changes in policy rates are being transmitted more quickly to borrowers, potentially easing their debt servicing burden as interest rates fall.