Low-Income Borrowers Drive Uptick in Short-Term Loans, Prompting RBI's Caution to Lenders

NEW-DELHI: A Hike in small loans, intended to meet daily needs, has raised concerns as personal loans ranging from Rs 10,000 to Rs 50,000 have surged by a significant 48 percent. This surge is notable, especially when the total debt held by banks remains at less than 15 percent. The heightened risk of default associated with these smaller loans has drawn attention, with the Reserve Bank of India (RBI) cautioning banks on the issue.

The Spike in borrowing activity for small personal loans is predominantly attributed to low-income customers who seek short-term financial relief. These loans typically have a tenure of three to four months. In response to the RBI's warning, banks and financial institutions have implemented measures to mitigate potential risks. This proactive approach has accelerated debt recovery efforts.

While the overall non-performing assets (NPA) situation in the banking sector has improved to a decade-low, challenges persist in the small loan category. As of June 2023, the NPA for loans below Rs 50,000 surged to 8.1 percent, marking nearly six times the NPA levels of 1.4 percent for all retail loans as of March 2023. In the 2022-23 fiscal year, loans under Rs 10,000 also experienced a substantial increase of 37 percent.

The Rise in loans ranging from Rs 10,000 to Rs 50,000, accounting for a 48 percent uptick, presents a growing trend in the short-term loan segment. Notably, in terms of volume, 38 percent of loan applications for amounts below Rs 10,000 in the past 12 months originated outside the top 100 cities in the country.

Rajeev Jain, CEO of Bajaj Finance, noted that short-term small loans are experiencing robust growth, driven in part by non-bank financial companies, including digital lenders. However, the trend may also impact traditional banks, as many of these institutions extend loans to non-bank financial companies. The surge in small personal loans and the accompanying risks highlight the importance of vigilance, responsible lending, and measures to ensure financial inclusivity while maintaining the stability of the banking sector.