RBI Raises Concern Over Rise in Tiny Personal Loans

The Reserve Bank of India (RBI) has directed lenders to tighten controls on tiny personal loans or small ticket loans following a spike in borrowing by low-income consumers. It may introduce stricter measures to keep a tab on risks due to the rise in cases of defaults.

Although bad loans in the banking sector continue to be at a decade-low, estimated at 3.6% of assets by March 2024 by the apex bank, it was monitoring a few categories of personal loans.

However, the central bank remains concerned over a rise in tiny personal loans, particularly loans of up to Rs 10,000 taken for a period of three to four months, often for ‘lifestyle’ spending.

The delinquency rate for loans less than Rs 50,000 stood at 8.1% as of June 2023, as per data from credit bureau CRIF Highmark. As per the latest RBI data, the number is well above the 1.4% bad loan ratio related to all retail loans as of March 2023.

The upward movement in small loans has been quite sharp, outpacing overall bank credit growth of about 15% in the past year. As per an estimate, over Rs 200 billion worth of Rs 10,000 loans were disbursed in 2022-23; these numbers were more than twice the amount of such loans disbursed in 2019-20.

The total value of loans less than Rs 10,000 surged to 37% in the financial year ending March 31, 2023, while loans of Rs 10,000-50,000 stood at 48%, as per the CRIF data. As per the RBI data, the rise in leverage pushed the country’s net household financial savings to a 50-year low of 5.1% of gross domestic product in the year ended March 31, 2023.

Non-bank financial companies (NBFCs), including digital lenders, are the largest lenders to this particular segment. However, banks could also be exposed, considering funds are sourced from them.