The Reserve Bank of India’s (RBI’s) caution on the build-up of stress in the consumer credit segment, notwithstanding the low level of delinquencies, is warranted. Highlighting this in its Financial Stability Report, released on Thursday, the central bank noted that a very high 42.7% of customers, who have taken a consumer loan, already had three live loans at the time of origination. Moreover, a good 30.4% of customers have taken more than three loans in the last six months.
Additional data cited by the central bank is equally worrying. For instance, 7.3 % of customers who had taken a personal loan of below Rupees 50,000 had at least one overdue personal loan. Moreover, the relatively high vintage of delinquency in personal loans (at 8.2%), the RBI observed, indicates falling standards of underwriting. The central bank has already initiated measures to address the build-up of risk. First, in mid-November, it clamped down on unsecured credit, and last week, it placed curbs placed on investments by banks in Alternate Investment Funds (AIFs).
The central bank is clearly uncomfortable with the rapid pace at which consumer assets are being built up and probably even more worried about the possibility that many of these loans are being ever-greened. In fact, one analysis by Transunion CIBIL had shown that delinquencies—money due past 90 days—in personal loans are inching up. While for the total personal loan portfolio, they were relatively small at 0.84%, for loans of a ticket size of less than Rupees 50,000, the delinquency levels are 6 times higher. Also, nearly 50% of this cohort of customers had taken more than four loan products in Q2CY2023 compared to 17% in Q2CY2019. Over-leveraging of this nature can vitiate the lending culture.
It was with the intention of reining in the growth in consumer loans, primarily unsecured credit, by making them costlier, that it increased risk weights for assets such as credit card receivables, to 150% from 125%. It is important to nip risk in the bud, and it is also always more desirable to have credit growing at a measured rather than a runaway pace.
However, the downside is that this would result in unserved and under-served borrowers having even less access to formal credit. The co-lending model, introduced in 2020, was aimed at combining the distribution reach of NBFCs with the lower fund costs of banks to lend to those who can’t access bank credit. By one estimate, some 50 partnerships have been forged so far between banks and NBFCs. Those NBFCs that have lower credit ratings and consequently higher borrowing costs have taken to co-lending in a big way. However, lenders are bound to tighten their credit filters, and one should expect a slowdown in the co-lending segment.