Surge In Unsecured Loans By Fintechs Led To RBI’s Tightening Of Lending Norms: Bernstein

A sharp rise in unsecured lending by Indian banks and fintechs led to the Reserve Bank of India (RBI) tightening lending norms late last year, a report by brokerage Bernstein said.

The brokerage said that there has been a sharp rise in the share of non-mortgage consumer loans over the last two years, led by unsecured segments such as credit cards and personal loans, Moneycontrol reported.

The analysts at the brokerage also highlighted the rapid growth in the number of fintechs in the country, which led to further increase in unsecured lending. Many of these fintechs tie up with banks and non-banking financial companies (NBFCs) to provide hassle-free loans to their users.

“The rapid growth and the sheer number of loans would merit a close monitoring from the regulator,” Bernstein said, adding that the growth in consumer loans has been steeper compared to household credits.

“While the broader household credit has largely grown in line with the system credit growth, consumer loans have grown at a much more rapid pace, with their share of banking credit almost doubling from 16% a decade ago to around 32% now,” the report stated. 

It is pertinent to note that the RBI, in November last year, increased the risk weight for consumer credit exposure of banks and non-banking financial companies, a move that was seen as a bid to increase the cost of unsecured loans. 

The central bank increased the risk weightage for outstanding as well as new unsecured consumer credit exposure of commercial banks and NBFCs by 25 percentage points to 125% from 100% earlier.

Following the RBI’s move in November last year, fintech giant Paytm decided to scale down its postpaid loan business.

Top officials of the RBI have in the past raised concerns about the exponential growth in unsecured lending.

Over the last couple of years, the central bank has also taken a number of other steps to better regulate fintechs and prevent risk build up in the economy.

Despite this, digital lending continues to be an attractive proposition for India’s fast-growing fintech sector and a number of such startups have forayed into digital lending to make the most of this opportunity.