Why unsecured loans are worrying RBI

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Are credit cards your favourite way to pay everywhere? Do you have any ongoing personal loans of any amount below Rs 50,000, which don’t require you to pledge any collaterals, and hence are easy to get? If yes, don’t take paying them on time lightly.

The RBI has now set sights on dealing early on with any potential defaults that might occur, given the unprecedented growth registered in the unsecured loan segment.

Meteoric growth, but deeper pitfalls await Between 2022-23, banks lent Rs 2.2 lakh crore worth of unsecured loans to individuals. Compare this with a disbursement of Rs 1.18 lakh crores banks lent to corporates during the same time, and you’ll realise how exponentially unsecured loans and credit cards are burgeoning.

In fact, home loans, another significant category, only marginally inched past unsecured loans, standing at Rs 2.49 lakh crore.

During April 2019-2023, the portfolio of Indian banks’ personal loan lending grew from Rs 5.5 lakh crore to a staggering Rs 11.1 lakh crore.

Credit Cards driving the bandwagon At present, debit cards active in India are at least 10 times more than their credit counterparts. But, they are swiftly losing their ground to the rising popularity of credit cards, which are increasingly gaining momentum in Tier 2, 3 and 4 Indian cities.

The gap between debit and credit card usage is steadily widening, warns RBI data. In April, India undertook 256 million transactions via debit card, as opposed to 263 million transactions that came via credit cards.

Debit card swipes, both physically and online, went downhill by 31% during last year. In the same period, credit card swaps jumped 20%.

Says Pune-based Nema Chaya Buch, founder of Wishing Tree Fin (OPC) Pvt. Ltd, “Personal loans on your credit cards are most expensive, so avoid them. In fact, it is also not advisable to take multiple credit cards in your name, since it adversely impacts one’s credit score. Also, don’t expand your credit limits, since the hefty interest payments will only come back to bite you”.

Are cracks showing up? Unsecured loans are generally the first payment avenues used for aspirational spending. Hence, the risk of default on them in case of an individual’s job loss or financial crunch is also extremely high. This is despite such loans being extremely lucrative profit streams for banks due to high interest margins they charge.

This is why the apex bank is considering increasing the risk weight on such loans. Risk weights refers to the amount banks need to keep aside for every unsecured loan that they provide. Currently, this stands at 100% for unsecured personal loans and 125% for credit card

While there have been no significant delinquencies noted in this sector as of now, RBI is of the view that this unbridled trajectory is bound to hit rock bottom sometimes. So, it’s best to start managing your financial health right away, so that you don’t find yourself heavily reliant on such loans in the near future.