In November, the outstanding credit card balance of banks rose 34% from a year earlier, even after the Reserve Bank of India imposed higher risk weights on unsecured lending in mid-November 2023. At ₹2.4 lakh crore, the outstanding balance in the segment accounted for 5% of total retail loans.
A bulk of it is flowing to the economically less well-off, with an average ticket size, or outstanding, of ₹40,000 by the subprime segment borrowers and about ₹60,000 by near-prime borrowers, according to an analysis of borrower data till March 2023 by economists at the RBI.
“In the case of credit cards, per live borrower credit outstanding is higher for the below-prime borrowers, suggesting a higher flow of credit to relatively riskier borrowers,” the economists wrote in a research paper, titled ‘Dynamics of Credit Growth in Retail Segment: Risk and Stability Concerns’. The views expressed in the paper do not reflect or represent those of the RBI.
The paper highlights that the regulator has been encouraging the use of technology, account aggregators, and strong underwriting and monitoring models to reduce the risk. There are other measures too to contain risk, it said.
“This can be further extended by prescribing debt-to-income limits for certain borrower or product categories,” the paper said. “DTI limits along with restrictions on loan-to-value ratios are found to be effective macro-prudential tools. Such macroprudential tools can be quickly calibrated in line with the evolving macro-economic situations to support or dampen the credit growth,” it said.
Retail loans have been propelling Indian banking growth for two decades, by expanding faster than corporate loans. While due to granularity this reduces the risk of high bad loans, it could lead to a build-up of risk if not monitored closely. The Reserve Bank, through a circular on November 16, increased the risk weights on consumer loans from banks, non-banking finance companies and credit card providers, making it more expensive for lenders to offer loans in these segments.
“This is an area which requires close monitoring as the use of cards has grown at a very aggressive pace,” said Madan Sabnavis, chief economist at Bank of Baroda. “In my view, if the RBI finds reason to believe there is unbridled growth, it could also come under higher capital charges. This will ensure that banks do more due diligence when issuing cards.”
The analysis of retail credit growth reveals that a few banks are contributing to a major share in retail credit growth. Between 2017 and 2023, on average 60% of the incremental credit is contributed by five banks, the RBI paper noted.
“The November 2023 measures by the Reserve Bank of India covers credit card exposure of banks as well. The bigger concern seems to be the surge in small-ticket personal loans,” said Sanjay Agarwal, head-BFSI at ratings firm CareEdge. “Any further measures, if any, regarding credit outstandings is likely to be institution specific.”
Meanwhile, banks say the system is solid and that risk management provisions are in place.
“Banks have always been following sufficient rigour while onboarding credit card customers,” said Chitrabhanu KG, senior vice president at Federal Bank. “Post the November 16, 2023 norms, which are also applicable to credit card portfolios, banks have continued to remain cautious in their credit assessment of new customers.”