Unsecured Loan Growth Hits 18-Month Low As Asset Quality Woes Remain

Growth in unsecured loans has slumped to its lowest level in the last 18 months, according to the recent data released by the Reserve Bank of India.

Personal loans and those extended by credit cards witnessed its slowest month, growing at 8.3% and 8.5% on-year in May, a sharp drop from 22.3% growth each in October 2023, respectively, RBI's sectoral deployment data showed.

This marks the slowest expansion in the segments since November 2023, when RBI introduced higher risk weights for retail unsecured loans extended by banks and non-bank financial companies.

The slowdown comes as lenders have adopted a more cautious approach, tightening credit filters amid concerns of over-leveraging among borrowers and rising delinquencies, especially in the NBFC and microfinance institution segments.

"Lenders are still skeptical to lend, looking at the overleveraging which has been playing out, making them celibately curtailing their growth on the personal loan and credit card side," Jinay Gala, director at India Ratings and Research, said.

This was also another factor why overall non-food credit grew 9.8% on-year in May, as compared with 15.3% in October 2023.

According to the RBI's June Financial Stability Report, unsecured retail lending formed 25% of retail loans and 8.3% of gross advances as on March 2025.

Despite the moderation in overall pace of such lending in recent quarters, private sector banks have seen growing signs of stress in their unsecured retail loan portfolios, with gross non-performing asset ratio rising to 1.8% as of March 2025, compared to 1.2% for the overall retail portfolio, the report said.

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.

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

While analysts expect growth in the June quarter to bottom out for personal loans, they see uptick from the second half of the financial year due to festive season kicking in from August onwards and a revival in demand on the back of widespread monsoon.

"Government's taxation benefit would also increase borrower's cash flow bringing in consumption," Gala said, adding that rural economy is still stable, leading to pick-up in demand in comparison to urban demand which has slowed down.

On the other hand, loans against gold jewelry, which are considered to be used for the same purpose jumped over twofold on-year in May.

Experts believe that this contrast of a rise in gold loans and a fall in personal loans makes a case for these loans being used for consumption purposes.

While moderation in growth has reduced immediate systemic risks, close monitoring is essential as interconnected borrower liabilities and rising stress in certain segments could pose future challenges