India’s Central Bank Set to Tighten Rules for Banks’ Unsecured Lending

India’s central bank, the Reserve Bank of India (RBI), is considering tightening its scrutiny of banks’ unsecured lending portfolios due to the risk of potential defaults, according to four banking sources. Unsecured loans, which are mostly personal loans and credit cards, do not require collateral and have a higher risk of default. However, they are also a big contributor to banks’ margins as they result in higher interest rates. One senior source familiar with the central bank’s thinking stated that excessive growth is the first sign of potential delinquencies. The RBI is expected to increase risk weights on unsecured personal loans and credit cards and may float a discussion paper on how to monitor the space more efficiently. The RBI has enough options with it for stricter vigilance, said a senior official at a large private sector bank. Banks’ outstanding on credit cards in India rose from INR 1.54tn ($20.5bn) in April 2020 to INR 2tn in April 2021, and vintage delinquencies have increased from 5% to 9%. Collection efficiencies have also deteriorated for these loan products. The central bank has been cautioning banks on unsecured lending amid rising interest rates and high inflation.