MUMBAI, April 21 (Reuters) – India’s central financial institution has cautioned lenders at conferences held over a minimum of the previous three months in regards to the rising danger of delinquencies on unsecured loans amid rising rates of interest and excessive inflation, 4 banking sources mentioned.

Unsecured loans – principally private loans and bank cards – don’t carry any collateral and due to this fact pose larger danger. Indian banks have been rising their unsecured lending portfolio because the pandemic-induced stress started to ease.

Banks’ excellent receipts on bank cards stood at 1.87 trillion rupees ($22.77 billion) as on Jan. 27, up from 1.53 trillion rupees from a yr earlier, as per the most recent information from the Reserve Bank of India (RBI).

“Risks in unsecured lending has been on the RBI’s radar,” mentioned a senior official at a personal financial institution. “The RBI has privately been cautioning banks regarding such risks, asking them to tighten underwriting practices.”

The bankers didn’t want to be recognized as a result of they weren’t authorised to talk to the media.

As per newest information out there from credit score data supplier CIBIL and revealed by the RBI, as of end-September 2022, delinquency ranges in combination client credit score throughout all product classes stood at 4.3% for state-run banks and 1.5% for personal banks in comparison with 4.8% and a couple of.4%, respectively, a yr in the past.

The RBI, based on bankers, is anxious that the sharp rise in rates of interest might set off defaults and pose extra danger. The RBI didn’t reply to an e mail requesting remark.

India’s rate-setting Monetary Policy Committee (MPC) has elevated the important thing repo fee by a complete of 250 foundation factors (bps) since May final yr to tame inflationary pressures.

This has pushed up the weighted common lending fee of banks by 95 bps in the identical interval.

Even because the MPC held the repo fee regular at 6.50% earlier this month, minutes of the panel’s newest assembly confirmed that members have been involved about inflationary dangers warranting additional hikes.

The passthrough of fee hikes to new financial institution loans, nevertheless, is instant with most loans linked to an exterior benchmark, just like the repo.

Aggressive lending could cause overheating and result in a deterioration in asset high quality if checks and balances aren’t maintained, a supply conscious of the central financial institution’s considering mentioned.

The RBI has requested banks to observe their unsecured lending portfolios, extra particularly bank cards, this individual added.

“The RBI’s main concern appears to be that interest rates are rising, and banks’ unsecured portfolio is expanding pretty fast,” mentioned one other senior banker at a number one non-public sector financial institution.

“It is trying to identify early warning signals in unsecured lending to not be caught off guard later.”

($1 = 82.1400 Indian rupees)

Reporting by Siddhi Nayak; Editing by Janane Venkatraman

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