RBI tightens the vigil on unsecured lending – A closer look at the heightened risk of default

financialexpress.com:

In a year marked by inflation and economic challenges; interestingly, there has been a surge in the discretionary spending on consumer products by India’s growing middle class. One of the driving factors behind this consumption uptick is the improved access to unsecured loans. The rise of fintech and digital lenders has played a pivotal role in improving the ease of borrowing especially for the tech-savvy Gen Z customers. Further, advent of data analytics and increased focus on customer centricity has ushered in innovative products including no-cost EMI options. According to a study, ~75% of customers used credit to acquire consumer durables and home appliances.

In a post-covid era, banks and NBFCs have witnessed exponential growth in unsecured lending with inquiry volumes increasing across product categories. Unsecured loans such as personal loans and credit card receivables have been a driving force (nearly doubled and growing at an avg. CAGR of 21% each since COVID-2020), contributing to ~30% of the incremental growth in retail loans and ~14% in overall loans as of Sept-23. Most lenders have managed to register 20%-60% growth in their unsecured loan portfolio between FY22 and Q2 of FY24.

Paradoxically, the asset quality of the unsecured retail loans has not shown any deterioration so far. Notwithstanding the low level of delinquencies, there are some early signs of risk build up in consumer credit. RBI in its recently published FSR highlighted some datapoints which indicate:

a) The transition matrix for consumer loans and personal loans showed an increase in their risk profiling (evidenced by downgrades exceeding upgrades)

b) Declining standards of underwriting (indicated by relatively high vintage delinquency of