1. Why are small consumer loans in India causing concerns for lenders and investors?
While corporate non-performing assets (NPAs) have decreased in recent years, lenders and investors have turned their attention to small consumer loans, particularly those less than ₹50,000. The rising stress in this segment has become a point of concern.
2. How significant are these small loans in the broader context of personal loans in India?
These small loans, classified as "other personal loans" by the Reserve Bank of India (RBI), constitute only 2% of all personal loans. As of August, the total personal loans in this category stood at ₹12.2 trillion, showing a 26% increase over the previous year. These unsecured loans are used for various purposes, including domestic consumption, medical expenses, travel, weddings, and debt repayment.
3. How are banks responding to these concerns?
Some large banks and non-banking financial companies (NBFCs) have become cautious about lending in this category. They are avoiding disbursing small-ticket personal loans below ₹50,000. The extent of this caution varies from one lender to another.
4. Why are some banks avoiding small-ticket personal loans?
There are several reasons. First, such loans may not align with the underwriting standards of these banks. Additionally, banks do not need to chase this kind of credit. While avoiding these loans, banks continue to pursue aggressive growth in the unsecured retail lending space.
5. Could this have an impact on consumption in India?
Small-value personal loans may have been used for consumption, so avoiding these loans might have some impact on consumption. However, the ultimate use of personal loans is diverse, making it difficult to gauge the precise effect on consumption.
6. How has the demand for personal loans changed in India?
The demand for personal loans has increased significantly, driven by a greater willingness to borrow for consumption. Personal loan disbursements surged in recent years, and the category with loans less than ₹50,000 and loans of ₹8 lakh and above experienced the steepest growth.
Conclusion:
Small consumer loans in India, especially those under ₹50,000, have become a cause for concern among lenders and investors. The concerns are leading some large banks and financial institutions to exercise caution when lending in this category. The impact on consumption and the future sustainability of such rapid growth remain key questions in the evolving landscape of personal loans in India.
