RBI Data 2023 Reveals : 92% of Outstanding Loans Dominated by Housing, Personal, Auto, and Credit Card Debts

In 2023, the Reserve Bank of India (RBI) increased risk weights on various loan categories such as credit cards, personal loans, consumer durable loans, and loans to non-banking financiers. This move aims to control excessive lending in riskier segments.

Consequently, banks and NBFCs must now maintain elevated capital reserves for these categories. For instance, the risk weight for every Rs 100 in personal loan receivables has been adjusted.

Now, after the increase in this to 125 percent, the risk-weighted assets become 125 percent of Rs 100, that is, Rs 125.

Therefore, the increase in capital requirement is Rs 11.25 minus Rs 9 = Rs 2.25 for every Rs 100 in personal loan receivables or 20 percent. This means the bank must put aside more funds, reducing the amount it can lend.

However, in 2023, retail lending grew by 18 percent year-on-year (YoY), with unsecured lending (loans not backed by collateral) continuing to see high growth. Personal loans and credit card spending grew at 22 percent and 28 percent respectively, as per the latest Reserve Bank of India (RBI) sectoral credit growth data Report. The report summarizes retail credit trends in the year gone by and expectations for 2024.

High interest rates and elevated inflation did little to slow down the demand for credit.

One of the key developments in 2023 was the RBI applying the brakes on unsecured and small-ticket loans. This has been seen as the central bank proactively managing the excess growth of small loans before asset quality worsens in this category.

“In 2024, hopes are high of inflation easing from its current levels, which will cool down interest rates, too,” says Adhil Shetty, Chief Executive Officer (CEO), BankBazaar.com. He adds that when that happens, loans will be cheaper. But with the RBI’s risk weight tweak, high-risk, small-ticket lending will draw back. Prime borrowers will continue to get the best loan offers, but it will be harder for subprime borrowers as lending to the risky segment tightens.

Personal loans grew 22 percent, but ticket size declines

As per the study of personal loan trends in BankBazaar’s Moneymood 2024 report, the average personal loan ticket size had been declining since 2019; the trend continued in 2023.

According to the report, while personal loans grew by 22 percent YoY, buoyed by global and local demand and a steady supply of innovative products that allowed customers to access small-ticket loans, the recent increase in risk weights for personal loans has made them more expensive and harder to get.

Shetty expects that in 2024, the unsecured loan landscape will change and adapt to the RBI’s new rules. Well-capitalised lenders will do well, but stressed lenders will struggle. “The demand, especially for small-ticket loans, will remain high. At the same time, the higher risk weights are going to have an impact on how fast unsecured loans grow as small-ticket loan providers become more cautious,” says Shetty.

The top four categories of loans account for 92 percent of the debt namely Personal, House loans, Credit Card loans, and Auto loans.

Home loan growth was slower compared to last year

According to the BankBazaar Aspiration Index, in 2023 home ownership continued to be one of the top three goals. The demand for home loans continued its upward trajectory despite higher interest rates, and the loan book of banks grew above Rs 21 lakh crore. However, growth was slower compared to last year (refer to graphic), and loan ticket sizes continued to rise. In 2023 — the average home loan ticket size disbursed on Bankbazaar was Rs 28.19 lakh. For metros, the average home loan ticket size was Rs 33.10 lakh, and for non-metros, it was Rs 22.81 lakh.

According to the report, in 2024, if inflation eases, an interest rate reversal could take the housing market to new heights. The falling rates will help all borrowers.

Co-brands and collaborations to drive credit card growth

As per credit card spending trends in the report, the number of credit cards outstanding crossed 94.7 million in October 2023. In tandem, credit card spends surged to record levels, hitting Rs 1.79 lakh crore. Average spend per card grew to Rs 5,577 from Rs 5,052 last year in the Diwali month — an increase of 10.4 percent YoY

The report indicates a 22 percent YoY growth in personal loans, driven by global and local demand, along with innovative products facilitating access to small-ticket loans. However, the recent elevation in risk weights for personal loans has increased their cost and accessibility challenges.

Looking ahead to 2024, Shetty anticipates shifts in the unsecured loan landscape, adapting to the RBI’s updated regulations. Strongly capitalized lenders are poised for success, while those facing stress may encounter difficulties in this evolving scenario.