Soaring credit card dues a new source of concern for RBI

Credit cards segment is seeing the sharpest increase among all the categories of retail loans and that much of it flowing to the subprime segment could make the regulator worry as the unsecured personal loans did in the recent past.
Even after the Reserve Bank of India imposed higher risk weights on unsecured lending by banks in mid-November 2023, credit card outstanding is the fastest growing segment at 34 percent on-year as of end November. The outstanding dues were at Rs 2.4 lakh crore, which is 5 percent of retail loans.

A bulk of it is flowing to the economically less well off with average ticket size of Rs. 40,000 for the subprime segment and about Rs. 60,000 for near prime, an analysis of borrower data upto March 2023 indicated. .

“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” economists at the RBI wrote in a research paper titled Dynamics of Credit Growth in Retail Segment: Risk and Stability Concerns.

The RBI paper highlights that the regulator has been encouraging use of technology, account aggregators, 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 (DTI) limits for certain borrower or product categories,’’ the paper said. “`DTI limits along with restrictions on loan- to-value (LTV) ratios are found to be effective macro prudential tools. Such macro prudential tools can be quickly calibrated in line with the evolving macro-economic situations to support or dampen the credit growth.’’Retail loans have been propelling Indian banking growth in the past two decades by growing faster than corporate loans. This on the one hand reduces the risk of high bad loans due to granularity, but this could also lead to build-up of risk if not monitored closely. The Reserve Bank increased risk weights on consumer loans from banks, non-banking finance companies (NBFCs) and credit card providers, making it more expensive for lenders across the spectrum to offer loans in these segments in its November 16 circular.”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 amongst banks reveal that a few banks are contributing to the major share in retail credit growth. Between 2017 and 2023, on average 60 per cent 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, Sr Director & Head BFSI at ratings firm Caredge. “Any further measures, if any, regarding credit outstanding is likely to be institution specific.”

But banks say that the system is solid and the risk management systems are in place. “Banks have always been following sufficient rigour while onboarding Credit Card customers,’’ said Chitrabhanu K.G., 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.”