RBI says monitoring certain personal loans for any signs of early stress

Over the last one year, banks have seen strong credit growth. While that growth has been broad-based, growth in the retail segment has been much higher than corporate credit growth. As the economy has rebounded post the pandemic, demand for loans has shot up, as people are buying homes, shopping more, and travelling more. This hasn’t gone unnoticed by the Reserve Bank of India, which is closely monitoring the personal loan segment for any early signs of stress.

According to the latest monetary policy report of the RBI, retail loans rose by 18.3 per cent in August and remained the prime contributor of overall credit growth. Credit to the housing sector expanded 13.8 per cent and vehicle loan growth was at 20.6 per cent in August. Credit cards, meanwhile, surged 30 per cent during the same time.

Personal loans and services credit contributed 37.7 per cent and 36.9 per cent, respectively, of incremental bank credit in August 2023, according to the report.

RBI Governor Shaktikanta Das said on Friday that the credit growth had been broad-based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking finance companies are also in line with that of the banking system, he noted.

“Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress,” said Das.

While there may not be any major stress seen in bank credit right now, Das said one needs to be mindful of what can pose a challenge going forward.

“Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” he said.

The need of the hour is robust risk management and stronger underwriting standards, he added.

This is not the first time that RBI has raised a cautionary voice on personal loans. In its financial stability report (FSR) in June this year, the central bank had noted that impairments in credit card receivables had increased marginally.