India's central bank has urged lenders to tighten controls on tiny personal loans following a surge in borrowing by low income consumers and may impose stricter measures to avert risks of a blowout in defaults, two people familiar with the matter said.
While bad loans in India's banking sector are at a decade-low, estimated at 3.6% of assets by March 2024 by the central bank, Reserve Bank of India Governor Shaktikanta Das said this month the central bank was monitoring some categories of personal loans, without elaborating.
What's worrying the regulator is a surge in tiny personal loans, particularly loans of up to 10,000 rupees ($120) taken for three to four months, often for "lifestyle" spending, according to a person familiar with the central bank's thinking.
Reuters could not determine when the regulator may tighten its rules.
Four people discussed the central bank's concerns with Reuters but declined to be identified as they are not authorised to speak to the media. The RBI did not respond to an email seeking comment from Reuters.
Delinquencies for loans under 50,000 rupees were at 8.1% as of June 2023, data from credit bureau CRIF Highmark shows. This is well above the 1.4% bad loan ratio for all retail loans as of March 2023, according to the latest RBI data.
Ismail Sayyed, a 30-year old cab driver from Mumbai, took his first personal loan of 5,000 rupees this year. He used some of it to buy a mobile phone and the rest on eating out.
But he fell behind on payments, and loan collection agents landed at his doorstep. "Why would three people show up to collect such a small amount?" he said.
The rise in small loans has sharply outpaced overall bank credit growth of about 15% over the past year.
The total value of loans below 10,000 rupees grew 37% in the financial year ending March 31, 2023, while loans of 10,000-50,000 rupees rose 48%, according to CRIF data.
By volume, 38% of loans below 10,000 rupees in the last 12 months were outside the country's top 100 cities, CRIF said in response to Reuters queries.
Central bank officials "have been ringing the bell", said an official at a large bank that has seen sharp growth in personal loans. The bank has not seen any large increase in delinquencies yet, this person said.
RISING LEVERAGE, HIGHER RISK
The increase in leverage pushed India's net household financial savings to a 50-year low of 5.1% of gross domestic product in the year ended March 31, 2023, data released by RBI last month showed.
Anecdotally, lenders are seeing an increase in "loan stacking", where a single borrower takes a number of small loans from multiple lenders, said a third source, an official at a non-bank lender, who is aware of the regulator's concerns.
For 32-year-old Parag Kadam, a household assistant in Mumbai, for example, loans of below 10,000 rupees have become a habit to meet the gap between his expenses and income.
Kadam says he sometimes uses new loans to pay off existing debt.
The "imprudence" being seen is in smaller ticket loans which are short term in nature, said Rajeev Jain, chief executive of Bajaj Finance, one of India's largest consumer lenders, in a post-earnings analyst call on Wednesday.
Non-bank financial companies, including digital lenders, are the largest lenders to this segment, but banks could also be exposed as funds are sourced from them.
Brokerage UBS downgraded Indian banks last week, citing increasing default risks in retail unsecured loans. This is likely to push up banks' credit losses by 50-200 basis points, it said.
"We think the risk of regulatory tightening is high," UBS analysts said.
($1 = 83.2400 Indian rupees)
