Personal loan credit by banks and NBFCs has almost tripled in the past six years to Rs 51.7 trillion, forming 30.3 per cent of the overall loan book as of March 31, 2023, as against Rs 18.6 trillion or 21.5% of the overall loan book as on March 31, 2017, said a report by rating agency CareEdge.
Overall Credit Market Size for Personal Loans (Credit of Banks+ NBFCs): CareEdge
The rate of growth of personal loan books (which typically signifies consumption loans) is almost double of the rest of the banking sector lending (business lending)
During the fiscal years 2017 to 2023, personal loan credit grew almost 1.5 times the overall credit growth observed in both Banks and Non-Banking Financial Companies (NBFCs).
Unsecured Personal Loan Growth Outpacing Overall Retail Loan Growth:
Within personal credit (which typically signifies consumption loans), unsecured personal loans outpaced the overall expansion of the personal loan book and constitute nearly one-third of the total personal loan segment loans at Rs 41 trillion as of March 31, 2023, noted CareEdge.
This trend has been further facilitated by the advent of Fintech and Digital channels, contributing to increased origination volumes.
Loans less than Rs 1 lakh constitute 85% of loans in FY23
The emphasis on smaller ticket-size loans by NBFCs has been a significant driver of volume growth in the unsecured personal loan segment. Loans with a ticket size below Rs 1 lakh constituted over 85% of loan originations by volume in FY23. Loans with ticket size below Rs. 50,000 hold the majority share in origination volume, witnessing a more than two-fold increase in origination value in this segment over the last two fiscals that ended March 2023.
What led to this increase in demand for personal loans?
“Several factors have contributed to the substantial increase in the demand for unsecured personal loans, encompassing demographic shifts, the formalization of the economy, elevated purchasing power, the evolution and prominence of FinTechs, widespread access to the Internet/broadband and feature phones, the adoption of digital payment systems, the influence of India stack and information collateral, and broader coverage of credit bureaus, etc,” said the CreditEdge report.
The transformation in consumer behaviour has emerged as a pivotal driver behind the upsurge in loan unsecured personal loan demand, particularly within consumption-driven growth patterns.
Notably, a perceptible shift in mindset is particularly evident among the younger demographic, who now embraces the idea of borrowing for consumption, contrasting significantly with perspectives from the past decade. “The significant evolution in loan processes, greatly influenced by the digital infrastructure, has significantly enhanced flexibility and convenience for consumers, especially the younger demographic. This evolution stands as a key facilitator in the consumption-driven growth witnessed today,” the report added.
Consumption-driven growth resulted in household savings dipping to 47-year low
However, this consumption-driven growth has also led to an increase in overall household financial liabilities. As per the latest report on household savings by RBI, Household savings in India hit a 47-year low at 5.1% of GDP in FY23. This was mainly on account of the increase in household financial liabilities indicating that people are becoming more dependent on borrowing to cover their consumption demands.
Household Savings in India as a % of GDP
The decline in household savings was witnessed especially post FY21 with pent-up demand post covid leading to higher consumption. Further borrowings would have gone up probably as a result of the difficulties brought on by rising inflation.
” While high household debt need not necessarily be a worry if there is adequate income to back, but a rising share of loans by people with weak earning profiles could lead to loan repayment problems in the unsecured retail lending segment which has been highlighted by RBI as well,” said the report.
Impact of latest RBI move to deter growth of personal loans
Strong signals from the Reserve Bank of India (RBI) could act as a deterrent to the growth of unsecured personal loans, potentially causing a partial slowdown in the immediate to near term. The impact on NBFCs is expected to be twofold, according to CareEdge:
RBI’s directive to increase risk weights by 25% for advances to AAA to A-rated Non-Banking Financial Companies (NBFCs) is likely to prompt banks to adjust loan pricing.
Additionally, RBI has raised the risk weights on NBFCs’ unsecured personal loan exposure by 25%. This adjustment is expected to impact the capital buffers of NBFCs. Consequently, there may be a slowdown in lending.
“Although the asset quality has remained stable, there is a need for vigilant monitoring, particularly on small ticket size loans; furthermore, given that each player focuses on specific sub-segments, this may lead to divergent credit cost trends in the unsecured retail portfolio of these players,” said the report.
FAQs
Personal loan credit by banks and NBFCs has almost tripled in the past six years to Rs 51.7 trillion, forming 30.3 per cent of the overall loan book as of March 31, 2023, as against Rs 18.6 trillion or 21.5% of the overall loan book as on March 31, 2017, said a report by rating agency CareEdge.
What is credit risk in NBFC? ›
Credit risk refers to the risk of loss resulting from a borrower's failure to repay a loan or meet contractual obligations.
Is there a risk to borrowing money from a personal loan? ›
While personal loans may be helpful in several situations, they can also come with high interest rates and major repercussions for your credit score. Even so, the benefits of these loans may outweigh the risks—especially if you qualify for a competitive rate and need quick access to cash.
What are high-risk personal loans? ›
A high-risk loan is a financing or credit product that is considered more likely to default, compared to other, more conventional loans.
What is the maximum interest rate charged by NBFC on personal loans? ›
Personal loan interest rates provided by NBFCs are competitive, ranging from 10.99% p.a. to 36.00% p.a. You can usually get a loan for up to Rs. 25 lakh or higher, with a processing fee of 2% to 3% of the loan amount.
What are the three types of credit risk? ›
Types of Credit Risk
- Credit default risk. Credit default risk occurs when the borrower is unable to pay the loan obligation in full or when the borrower is already 90 days past the due date of the loan repayment. ...
- Concentration risk. ...
- Probability of Default (POD) ...
- Loss Given Default (LGD) ...
- Exposure at Default (EAD)
Lenders can use a number of tools to help them assess the credit risks posed by individuals and companies. Chief among them are probability of default, loss given default, and exposure at default. The higher the risk, the more the borrower is likely to have to pay for a loan if they qualify for one at all.
How do I protect myself from a personal loan? ›
How to Lend Money Safely
- Tell your friend or relative you'll think about lending them money. ...
- Look at your finances before making a loan. ...
- Get everything in writing. ...
- Think about the risks. ...
- Consider setting the debt repayment plan on autopay. ...
- Understand the legal and tax consequences. ...
- Consider whether to charge interest.
Before deciding to get a personal loan, you must consider potential downsides, such as high interest rates, steep fees and a hit to your credit score if used incorrectly.
Can a bank sue you for a personal loan? ›
If your loan is unsecured, the lender or debt collector can take you to court to seek repayment through wage garnishment or place a lien on an asset you own such as your house.
7 Higher-Risk Mortgages To Avoid
- 40-Year Fixed-Rate Mortgages. Borrowers taking out 40-year mortgages with a fixed rate stretch their loan payments over a longer time. ...
- Adjustable-Rate Mortgages. ...
- Balloon Mortgages. ...
- Interest-Only Mortgages. ...
- Loans With No Down Payment. ...
- Reverse Mortgages. ...
- Subprime Mortgages.
Although loan amounts vary across lenders, the maximum amount for personal loans typically ranges from $500 to $100,000. In some cases, you may qualify for a loan larger than what you need. Before accepting any loan, consider what you can afford to repay and be sure you don't borrow more than what you can manage.
What is an example of a high risk loan? ›
Startups. Startup businesses may be considered high risk simply because they don't have financial records to demonstrate their ability to make payments on a loan. In these cases, lenders rely heavily on a business owner's personal credit and repayment history, and in some cases, collateral.
What is Nbfc in loans? ›
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance ...
What is interest rate risk in NBFC? ›
Interest rate risk means the chance that the value of an investment could drop because interest rates change unexpectedly. Interest rate risk (IRR) refers to the potential for a change in interest rates to reduce the value of an investment or asset.
What is the limit of NBFC borrowing? ›
NBFC-Infrastructure Finance Companies
| Exposure limits for the NBFC- IFCs in the middle layer (as a % of Tier 1 capital) | Exposure limits for NBFC-IFCs in the upper layer as per large exposure framework (as % of eligible capital base) |
|---|
| Single borrower | 30% | 25% (additional 5% with Board approval) |
| Single group of borrowers | 50% | 35% |
What Is Credit Risk? Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan. Essentially, credit risk refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection.
What is the difference between interest rate risk and credit risk? ›
Bonds with a heavy interest rate risk are subject to changes in interest rates, and they tend to do poorly when rates begin to rise. "Credit risk" refers to the chance that investors won't be repaid for the amount they paid in, or at least for a portion of interest and principal.
What is the difference between credit risk and default risk? ›
Credit risk is a broader category that includes all risks associated with non-payment, such as exposure risk and recovery risk. Default risk, however, specifically relates to the event of default. While all default risks are credit risks, not all credit risks result in default.
What is the difference between market risk and credit risk? ›
Market risk is what happens when there is a substantial change in the particular marketplace in which a company competes. Credit risk is when companies give their customers a line of credit; also, a company's risk of not having enough funds to pay its bills.
