Lack of credit history of borrowers pose challenge to banks: RBI Bulletin

The observation is significant in the context of a sharp jump in retail unsecured loans of Indian banks in the recent months.

The lack of credit history of borrowers and good collateral, combined with information asymmetry, exacerbates the challenge for lenders to lend, as stated in the Reserve Bank of India (RBI) monthly bulletin on July 17.

The observation is significant in light of a significant increase in retail unsecured loans by Indian banks in recent months. According to RBI data, banks' lending for credit cards, personal loans, and similar products has experienced a notable rise in the past year.

The RBI bulletin is a monthly publication written by the central bank's staff, providing insights into key developments in domestic and global economies. It is important to note that the views expressed in the Bulletin do not necessarily represent the official views of the central bank.

Going by the latest Financial Stability Report (FSB) of RBI, the composition of secured and unsecured advances has changed between March 2021 and March 2023. This period saw unsecured retail loans rise from 22.9 percent to 25.2 percent and secured loans fall from 77.1 percent to 74.8 percent. This means that banks are clearly eying to grow their unsecured book that include credit card loans, personal loans, and so on.

For example, the country's largest private sector bank, HDFC Bank, in the April-July FY24 quarter reported retail advances of Rs 6.57 lakh crores, a jump of 18 percent on a year-on-year basis.

Private sector lender Federal Bank in the same quarter reported a retail loan portfolio of Rs 58,422 crores, growing by 17 percent on a year-on-year basis.

Going ahead, the bulletin said that technological innovations in the financial sector have improved the credit delivery mechanisms.

"The scope for further innovation in banking and financial products and furthering differentiated banking needs to be explored," the bulletin said.