A drastic exercise by the Reserve Bank before the problem of NPAs in banks rears its head again

- Increase in unsecured loans due to credit competition among financial institutions

As a precautionary measure, the Reserve Bank of India (RBI) has increased the risk weight in consumer credit from 100 percent to 125 percent for both banks and non-banking financial companies (NBFCs). However, this standard has not been applied to housing, education, vehicle and gold loans. In an October policy statement, RBI Governor Shaktikanta Das also expressed concern over rising unsecured loans and directed banks and NBFCs to tighten their internal controls.

In case of any stress on unsecured loans, banks ultimately bear the brunt, as there is no collateral against these loans, making it difficult for banks to recover money from borrowers.

After a long period, the performance of the country's banking sector is currently looking encouraging. Banks' profits have increased after a long time and the proportion of NPAs or bad loans on the books has come down. Increase in net profit is seen due to reduction in provision for bad loans and contingency. Due to the reduction in NPAs and the low level of new NPAs, banks do not have to make more provisioning as before. The main reason for the increase in net profit of banks is the increase in net interest income.

During the period from 2008 to 2013, a large amount of loans were provided to the industrial sector in the country. With many of these loans becoming NPAs, pressure came on the banks and the Reserve Bank and the government were forced to undertake a massive exercise to bail out the banks. The experience of the period 2008 to 2013 is now being applied by the Reserve Bank. During the financial crisis of 2008, risks were seen in all types of loans. Experts are saying that the Reserve Bank has increased the risk weight keeping in view the fact that the crisis in any one category of loans does not take time to reach the rest of the loans.

An aggressive policy of providing credit to businesses is welcome in any economy but the exercise of banks to provide uncollateralized or unsecured loans to survive in the competition ends up putting public money at stake. When the banks have come out of the NPA problem, it remains the responsibility of the bank boards, managers and directors to ensure that the stability achieved by His Highness is maintained and that the problem of bad loans does not re-emerge, even as the Reserve Bank intervenes to try to curb the growth of unsecured loans. have done

For the last few years, there has been a significant increase in consumer loans in the country. In the period from March 2021 to March 2023, there has been a compound annual growth of 24.80 percent in retail loans. Which was double the overall loan growth. Along with the increase in the use of credit cards in the country, the amount of NPAs in the credit card segments in the banking sector increased to 18 percent at the end of March 2023 from nine percent a year ago. Thus, the increase in credit card usage becomes dangerous for banks along with revenue growth.

In terms of personal loans, the asset quality of banks is showing a sharp improvement, but the recovery in the credit cards receivables segment is seen to be declining. After Corona, there has been a wide change in the type of payments in the country, one type of which is payments through credit cards. With the rise in e-commerce, the use of credit cards is increasing.

At the end of the financial year 2023, the outstanding amount due to credit cards increased by 31 percent or Rs 45,866 crore to Rs 1.94 lakh crore. Debts on credit cards are high risk, as there is no collateral against them.

Ever since stringent norms have been implemented in the country for providing credit to large industrial houses and companies, banks have been striving towards retail lending to grow their business. There is nothing wrong with the increase in retail lending but the increase in unsecured retail lending in retail lending can be a matter of concern. In the period from March 2021 to March 2023, there has been a wide change in the amount of secured and unsecured credit. The percentage of unsecured loans has increased from 22.90 per cent to 25.20 per cent while the percentage of secured loans has come down to 74.80 per cent from 77.10 per cent. Which indicates how aggressive banks have become in providing loans.

Despite frequent warnings, the share of unsecured loans is increasing as compared to secured loans. As banks are competing in disbursing loans, the Reserve Bank believes that there is not enough scrutiny in providing loans. The Reserve Bank is believed to have increased the risk weightage in view of the fact that the widespread growth of unsecured loans at lower levels has made it difficult to verify its asset quality. It is also the responsibility of every stakeholder to ensure that the amount of unsecured loans does not increase, considering that the exercise of recovery of money from the defaulters of unsecured loans is not very successful.