Indian banks, which have celebrated their success in reducing overall non-performing assets (NPAs) in recent years, are now grappling with a troubling rise in NPAs in the personal loan and credit card segments. This surge comes at a time of increased borrower indebtedness, raising alarms about the sustainability of growth in unsecured lending.
According to data from the Reserve Bank of India (RBI), NPAs in personal loans rose by 51% from ₹7,422 crore (0.93% of advances) in March 2023 to ₹11,210 crore (1.16%) by June 2024. In just three months from March 2024 to June 2024, NPAs in this segment increased by ₹1,522 crore, from ₹9,688 crore. Meanwhile, overall gross NPAs in the banking sector dropped significantly, from ₹6.97 lakh crore (5.89% of advances) in March 2022 to ₹4.56 lakh crore (2.79%) in March 2024.
The credit card segment is witnessing an even sharper rise in bad loans. NPAs in this segment jumped by 136% from ₹2,404 crore (1.82% of advances) in March 2020 to ₹5,679 crore (2.04%) in June 2024. Between March 2023 and June 2024 alone, NPAs increased by 39.46%, from ₹4,072 crore to ₹5,679 crore. These figures underscore growing stress in unsecured lending, which typically carries high-interest rates and is more vulnerable to default.
Unsecured loans, including personal loans and credit cards, are considered high-risk due to the lack of collateral. Delayed credit card payments often attract interest rates as high as 42-46% annually, further burdening borrowers and affecting their credit scores.
The RBI, in November 2023, raised risk weights on bank exposures to consumer credit, credit card receivables, and non-banking financial companies (NBFCs) by 25%, bringing them to a maximum of 150%. This move aimed to curb potential risks in these high-growth segments. The central bank’s Financial Stability Report noted that while consumer credit inquiries remain strong, higher risk weights have slowed the growth of personal loans and credit card usage.
The rising use of credit cards highlights a growing reliance on unsecured credit. Credit card transaction values have tripled over three years, reaching ₹18.31 lakh crore in March 2024, up from ₹6.30 lakh crore in March 2021. Monthly spending has surged, with card users spending ₹1.76 lakh crore in September 2024 compared to ₹72,319 crore in March 2021.
As competition among lenders intensifies and cash flow pressures persist in certain borrower segments, signs of stress are emerging in unsecured business loans as well. Analysts caution that borrower overleveraging, lower recovery rates, and increasing write-offs could further challenge asset quality in these high-risk segments.
