Banks Hold Stressed Unsecured Loans Exceeding Rs 93,240 Cr

While pointing fingers at non-banking finance companies, particularly fintechs operating digital lending apps, for the substantial surge in unsecured loans, banks find themselves holding over Rs 93,240 crore of unsecured loans classified under the special mention accounts (SMA) category—indicating signs of stress or overdue repayment.

These special mention accounts represent nearly seven per cent of the total unsecured loan outstanding of Rs 13.32 lakh crore for banks. Public sector banks exhibit a higher SMA of 9.9 per cent in unsecured personal advances compared to private banks, standing at four per cent for unsecured retail loans as of 31 March 2023. On an aggregate level, banks have seven per cent of their unsecured retail loans falling into the SMA-0, 1 and 2 categories, according to Care Ratings.

The SMA share of secured retail advances also stands at around seven percent as of 31 March 2023, according to the same source.

As per RBI classification, SMA-0 denotes that principal or interest payment is not overdue for more than 30 days but the account shows signs of potential stress. In SMA-1, the payment is overdue between 31-60 days and in SMA-2, the payment is overdue between 61-90 days. If the repayment is delayed by more than 90 days, it's classified as a non-performing asset (NPA).

The growth of unsecured personal loans, including credit card receivables, consumer durable loans and other personal loans, in banks from March 2017 to March 2023, stands at 21 per cent, outpacing the growth of personal loans, which exhibited a growth of 19 per cent during the same period.

Unsecured personal loans constitute almost one-third of the overall bank's personal loan credit of Rs. 40.9 lakh crore as of 31 March 2023, with NBFCs accounting for Rs 10.9 lakh crore of personal loans, according to a Care report.

The report also indicates that fintech NBFCs are most susceptible to the potential impact of unsecured personal loans turning sour, with private sector banks, public sector banks, and other NBFCs following in decreasing order of potential impact. This emphasises the importance of a vigilant approach to risk management, particularly for fintech NBFCs, in navigating challenges associated with the unsecured personal loan segment.

Furthermore, banks have been increasing their loan exposure to NBFCs, rising from Rs 7.75 lakh crore in March 2021 to Rs 9.23 lakh crore by September 2022. The Centre for Advanced Financial Research and Learning (CAFRAL), established by the RBI, recently expressed concerns about the surge in bank financing for NBFCs, emphasising the need for tighter preventive measures to mitigate potential systemic fallout.

A financial sector source noted, "If NBFCs are being blamed for the rise in their stressed loan portfolio, banks that fund them are also responsible for it."

Unsecured personal loans are a type of loan that doesn't require collateral from borrowers. Numerous digital lending apps, both legal and illegal, play a significant role in extending unsecured loans.

On 16 November, the RBI increased risk weights on banks' exposure to consumer credit, credit card receivables and NBFCs by 25 per cent, up to 150 per cent. This move aims to discourage aggressive lending to these loan segments. The central bank increased risk weights on credit card receivables by 25 per centage points to 150 per cent and 125 per cent for commercial banks and NBFCs, respectively. The outstanding credit card amount for banks had risen by 29.9 per cent on a year-on-year basis to Rs 2.17 lakh crore as of September 2023.