Unsecured loans of NBFCs grow faster than secured loans in 2023: RBI data

“Banks are very competitive on rates on secured finance, but in terms of unsecured lending, banks are not as nimble as NBFCs and hence the latter have a huge share in unsecured lending,” said Sanjay Agarwal, senior director, Care Edge Ratings.

Further, A M Karthik, Senior Vice President & Co-Group Head, Financial Sector Rating, ICRA, said that the sharp growth in personal and consumption loans, unsecured SME/business loans and microfinance loans during FY2023 contributed to higher growth.

The RBI report said that the pace of expansion in the balance sheet of NBFCs accelerated in 2022-23, aided by double-digit credit growth, mainly on account of unsecured loans.

Earlier on December 28, while speaking at an SBI banking and economics conclave in Mumbai, RBI deputy governor J Swaminathan cautioned about the growing interconnectedness of banks and NBFCs, citing the sharp surge in loan growth.

“There is fear of interconnectedness as bank loans to NBFCs have been growing at 30 percent,” said Swaminathan.

NBFCs relied more on bank funds, as at end-September 2023. The share of bank borrowings of NBFCs stood at 37.8 percent of the total borrowings.

Swaminathan further said that the RBI would not like to prescribe an upper limit to the number of lenders and stressed the need for banks to invest more in IT infrastructure.

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RBI norms on unsecured loans

On November 16, the RBI had increased the risk weight on consumer loans advanced by commercial banks and NBFCs by 25 percentage points. The consumer credit of banks and NBFCs attracts a risk weight of 100 percent, which has been revised to 125 percent.

This means banks and NBFCs must set aside more capital while extending such loans.

On the NBFC front, the increase in risk weight has been extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans.

Additionally, the RBI increased the risk weight on bank credit to NBFCs by 25 percentage points in all cases where the extant risk weight, as per the external rating of NBFCs, is below 100 percent. In terms of extant norms, loans by banks to NBFCs, excluding core investment companies, are risk-weighted as per the ratings assigned by accredited external credit assessment institutions.

Agarwal said that those NBFCs which have both the products will probably slow down unsecured lending, rather than speeding up secured lending, after the new RBI norms.

Similarly, Karthik added that overall growth shall moderate in the unsecured loans segments in the current and the next fiscal, from the peaks witnessed in FY2023.

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Sectoral credit of NBFCs

According to the RBI report, in the sectoral distribution of NBFC credit, the industry accounted for around two-fifths of the overall lending portfolio at end-March 2023, attributable to infrastructure lending by large government-owned NBFCs, followed by retail lending, with a share of around 31 percent.

In 2022-23, growth in credit to industry by NBFCs stood at 12.8 percent. It was 5.7 percent more than what was advanced by the banking segment.

Credit to the retail segment by both NBFCs and banks grew at over 20 percent. Credit by NBFCs to the services sector rose at a robust rate, albeit marginally lower than banks.