In its monetary policy statement, the Reserve Bank of India (RBI) rightly sounded a warning to banks and NBFCs on the rising risks in their retail loan portfolio. The directive to strengthen internal checks and establish safeguards in such loans sends a strong signal that the central bank is uneasy about increasing risks in this segment. The RBI Governor had given similar warning to banks in May this year, asking regulated entities to not evergreen their retail loans or hide the stress in their books. The central bank is clearly suspicious about the robust growth numbers in retail loans and these verbal warnings could be a precursor to stronger action on this front.  

The RBI’s concern about retail loans is not without merit, as banks, flush with funds, have been aggressively chasing retail borrowers over the last two years. Credit to retail borrowers stood at ₹47.7-lakh crore in August 2023, more than doubling from ₹19.08-lakh crore in March 2018.  While overall non-food credit has grown at a compounded annual growth rate of 14 per cent in the last five years, loans to retail borrowers have grown at a CAGR of 20 per cent. Due to the higher growth, retail loans now account for 32 per cent of non-food credit. Of concern is that these loans also account for the largest share in incremental credit (August 2023 y-o-y), at 38 per cent, while loans to industry makes only 11 per cent of the new credit. Banks may be going after the low-hanging fruit in chasing retail borrowers while being more cautious in lending to industry. This does not bode well for capital investment. 

The other problem with the growing pile of retail credit is the higher risk in some categories. Unsecured credit card loans and other personal loans have grown at a faster pace, which exposes financial institutions to greater risk. Further, the increasing use of fintech companies to acquire customers may be increasing bank exposure to new to credit and subprime borrowers. There is also growing suspicion that the distress among the retail borrowers is being concealed by rolling over loans or through accounting jugglery. Increasing competition among banks and NBFCs for a share of retail credit could also be making it easier for retail clients to repay loans with fresh loans borrowed from another entity. This poses a systemic risk.   

With rates expected to remain elevated well into 2024 and liquidity expected to be tight, smaller borrowers will find it increasingly difficult to refinance these loans. Besides issuing warnings, the RBI could audit the retail portfolio of banks and NBFCs which have recorded an aggressive growth in their retail portfolio in recent times. The recent ban on a public sector bank from onboarding new customers on the banking app shows that employees of banks are being set stiff targets in customer acquisition, digital banking and so on. The sense from the Governor’s statement is that the RBI will not hesitate to step in if lenders don’t heed its warning. That’s the right signal from the regulator.