Mint Explainer: Why has the surge in personal loans caused a stir?

livemint.com:

RBI) has expressed concern about the brisk growth in personal loans, even as most of the industry seems not-too-worried, except on the specific segment of small loans (under ₹50,000). Mint takes a closer look at the increasing demand for personal loans and why banks seem unfazed by the regulator’s words of caution. While RBI classifies all retail loans as personal loans, there is a specific category of bank loans that it classifies as ‘other personal loans’.

These loans include credit for domestic consumption, medical expenses, travel, marriage and other social ceremonies and loans to repay debt, besides others. ‘Other personal loans’ rose 26% y-o-y to ₹12.2 trillion in August. In fact, this category has grown 56% in the past two years, according to RBI data.

That apart, outstanding amounts on credit cards also increased 30% yoy in August to ₹2.17 trillion. Private banks and non-bank financiers have been operating in the unsecured personal loan space for some time now, but state-owned lenders are also trying to make the most of the uptick in demand for these loans. Although the wider retail loan category has grown in the past few years, it includes the impact of the rapid growth in home loans, a secured asset category.

Since unsecured loans are not backed by collateral, recovery is harder in cases of default. Meanwhile, credit bureau TransUnion Cibil said in a report in April that vintage delinquency (the percentage of loan accounts where repayments have been delayed by over 30 days in the first six months) in personal loans was higher in the December quarter of 2022 than in the pre-pandemic period. The banking regulator recently cautioned lenders about the surge in personal loans.