The RBI has asked banks to increase their internal surveillance mechanisms due to the very high growth recorded in personal loans.
Key Highlights
- RBI mentioned that certain components of the personal loan segment have recorded very high growth.
- The Central Bank is monitoring the situation for any incipient stress.
- The regulator has asked financial institutions to keep safeguards in place for their own interest.
The Reserve Bank of India on Friday hinted towards a trend that may require higher vigilance from banks and NBFCs: exponential growth in some components of personal loans.
In a press release on the Monetary Policy meeting of the RBI, the Central Bank mentioned that the credit growth in the financial system is “broad-based and backed by the strong fundamentals of financial institutions.”
The non-food credit growth in the banking system rose by 15.3 percent as on 22nd September, 2023 despite a high-base effect.
However, the breakup of the growth recorded reveals that the services sector and the personal loan segment captured the most credit deployment, with their share increasing in the incremental credit off-take in the first half of FY 2023-24, when juxtaposed with the previous fiscal year.
Personal loans as a segment constituted approximately 37.7% of the year-on-year incremental credit offtake in August 2023, followed by the services sector which constitutes 36.9 per cent.
Growth of Personal loans at the cost of loans to Industries
The growth in the personal loan segment comes at the cost of loans to industries, which experienced a deceleration in growth, now standing at 6.1 per cent. In fact, the RBI notes that credit deployment to all industries experienced a slowdown relative to last year, barring the textiles sector and the basic metals sector.
While this could reveal the propensity of banks to disburse more retail loans (ie. personal loans) as compared to loans to the industry, it may also reflect a trend on the micro level- more individuals taking loans either due to financial stress or as a means to upgrade their lifestyle.
Taking note of the growth in this segment, the RBI has asked financial institutions to “address the build-up of risks, if any” and maintain strong safeguards for a healthy balance sheet.
The RBI’s decision to keep the repo rate unchanged at the MPC meeting will however augur well for the retail segment, keeping the EMIs unaffected.
