The Ministry of Finance has requested the Reserve Bank of India (RBI) to encourage private sector banks to increase their exposure to corporate lending amid growing concerns about the shift in focus towards unsecured retail loans, Department of Financial Services (DFS) secretary Vivek Joshi said.
Emphasising the need for a more balanced approach in lending practices, Joshi told Moneycontrol in an interview, "We have asked the RBI to nudge private lenders to enhance their corporate lending portfolios. Currently, the heavy lifting of corporate lending is being done by a few public sector banks.”
The Reserve Bank of India (RBI) has expressed concerns about the rise in unsecured advances, a high-risk segment of retail loans. According to a research paper by RBI employees dated January 18, the share of such advances increased to 35 percent in 2023, up from 25 percent in 2007.
Despite the private banks' substantial share in the overall lending market, their corporate lending has remained relatively low.
The DFS Secretary's remarks come as the RBI has noted a rapid growth in unsecured retail lending among private banks. In November 2023, the RBI announced a hike in the risk weighting for unsecured lending, including personal loans and credit card loans, raising it from 100 percent to 125 percent. The delinquency levels among borrowers with personal loans below Rs 50,000 remain high, the RBI's Financial Stability Report (FSR) said in June this year.
Public sector banks have managed to maintain lower delinquency rates.
"We must address the potential consequences of an overemphasis on retail lending, which could negatively impact corporate lending and broader economic growth," Joshi said.
CASA
In addition to corporate lending concerns, there is a growing disparity between deposit mobilisation and credit growth.
The CASA (Current Account Savings Account) ratio for scheduled commercial banks is currently at 41 percent, a decrease from 45 percent in 2017-18. "Although a CASA ratio above 40 percent is considered healthy, banks need to innovate and improve efficiency to remain competitive," the secretary added.
The public sector banks must enhance their operational efficiency and reduce costs by leveraging AI and technology. "To stay competitive, public sector banks must cut costs and improve service quality through technological advancements," the DFS Secretary opined.
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