RBI flags rising risks in consumer lending

“Our recent macroprudential measures to curb lenders’ exuberance towards certain segments of retail loans underline our commitment to preserve financial stability without compromising the availability of funds for productive requirements of the economy,” Das wrote in the foreword to RBI’s half-yearly Financial Stability Report.


Das was referring to the central bank’s November decision to raise risk weights on consumption loans, or those not backed by collateral. RBI has been pointing out how its decision to raise the risk weights was a pre-emptive measure.

The report said although delinquency levels across various groups of lenders declined, there are some signs of risk build-up in consumer credit. It presented four points to illustrate its concerns.


First, it found an increase in risk profiling for consumer loans and personal loans, with downgrades exceeding upgrades. Second, relatively high-vintage delinquency—the percentage of accounts that have ever become delinquent within 12 months of origination—of personal loans at 8.2%, it said, indicates declining standards of underwriting. Third, 42.7% of customers availing consumption loans already had three existing loans at the time of origination, and 30.4% have availed more than three loans in the past six months. Last, 7.3% of customers availing a personal loan below 50,000 had at least one overdue personal loan.

Das said the health of the financial system is steadily improving on the back of multi-year high earnings, low level of stressed assets, and strong capital and liquidity buffers at financial institutions.

“We have made significant progress since the onset of the covid-19 pandemic in steering the economy and the financial system. Now is the time to consolidate these gains and enable the economy to move to a higher growth trajectory with macroeconomic and financial stability,” said Das.

Meanwhile, in its stress analysis, RBI found that the gross non-performing asset (GNPA) ratio of banks might improve to 3.1% by September 2024 under the baseline scenario, from 3.2% reported as on 30 September. In case the external environment worsens to a medium or a severe stress scenario, the GNPA ratio could rise to 3.6% and 4.4%, respectively.

Under the baseline scenario, state-owned banks may see the maximum decline in bad loan ratio—down 30 basis points (bps)—between September 2023 and September 2024, albeit on a higher base.

RBI conducts macro stress tests to assess the resilience of bank balance sheets to unforeseen shocks. The results come with a disclaimer that the adverse scenarios are stringent conservative assessments under hypothetical adverse economic conditions and, therefore, the model outcomes should not be interpreted as forecasts.

As pointed out on Wednesday in the Report on Trends and Progress of Banking in India, gross bad loans as a percentage of total loans fell from 5.8% in 2021-22 to 3.9% in 2022-23, and further to 3.2% as on 30 September. The 3.2% bad loan ratio, RBI said on Thursday, was an 11-year low.

Stress tests for credit risk, the report said, found that banks have enough capital buffers, and their capital ratios will remain above the regulatory minimum even under adverse stress scenarios.

According to Das, RBI and other financial regulators remain invested in preserving financial stability and fostering a financial system that is resilient to shocks and supportive of growth.

“Even as we confront global headwinds and emerging challenges from technological disruptions, cyber risks and climate change, our endeavour is to continue to fortify the financial system, promote responsible innovation and invigorate inclusive growth,” he said.

Meanwhile, a systemic risk survey by RBI in November found risk perceptions have either receded or remained unchanged across major categories of risk, except macroeconomic risks. The report said that while a quarter of the survey respondents said their confidence in the stability of the global financial system has declined in the last six months, over 95% of them felt that the stability of the Indian financial system has either increased or remained unchanged.

“As we come to the close of 2023, the global economy and the financial system continue to recover from successive high-intensity shocks over the last four years. There are multiple challenges on the horizon: slow and divergent growth prospects; elevated debt levels; growing geo-economic fragmentation; and prolonging conflicts,” said Das.

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Published: 29 Dec 2023, 12:04 AM IST