RBI Financial Stability Report: Higher Unsecured Lending Write-Offs Among Private Banks A Worry

The Reserve Bank of India is concerned about higher unsecured lending write-offs among private sector banks, the Financial Stability Report for December 2024 showed.

While banks' retail loan quality has remained stable so far, with the gross non-performing assets ratio was 1.2% in September.

"The GNPA ratio for unsecured lending was marginally higher at 1.7 per cent," the report said. "An area of concern, however, is the sharp rise in write-offs, especially among private sector banks, which could be partly masking worsening asset quality in this segment and dilution in underwriting standards."

Fresh accretion of the NPAs in retail loan portfolios was also dominated by slippages in the unsecured loan book, with 52% coming from unsecured loans as of September. Small finance banks are witnessing larger impairment in their retail lending portfolio, with the GNPA ratio at 2.7% and the unsecured GNPA ratio at 4.7%.

Upgradation is declining and slippage from special mention accounts-2 to the NPAs are on the rise, according to the report. The SMA-2 is a special mention account when a borrower is overdue on loans for more than 60 days and up to 90 days.

This has come as nearly half of the borrowers availing credit card and personal loans already have another loan outstanding, which are often high-ticket loans, such as house or vehicle loans.

So far in the current financial year, 11% of the borrowers originating a personal loan under Rs 50,000 had an overdue personal loan and over 60% of them had availed more than three loans.

Nearly three-fifths of customers who have availed personal loans in the July–September period had more than three live loans at the time of origination, it added.