Why Is RBI Issuing Caution Against Smaller Personal Loans Less Than Rs 50,000?

Amidst Reserve Bank of India's (RBI's) approach to tighten law about personal loans less than Rs 50,000, asking banks to be cautious it is imperative to look at the larger picture on the personal loan segment and also dwell upon the the stir that this segment has caused. 

Another pertinent question that follows is, at a time when Mallya and Nirav Modi are still at large defrauding banks of crores of rupees, why is RBI issuing caution against smaller personal loans?

As per data accessed from from credit bureau CRIF Highmark, it shows that payment irregularity for loans under 50,000 rupees were at 8.1% as of June 2023. The portion is well above the 1.4% bad loan ratio for all retail loans as of March 2023, latest RBI data has showed.

Smaller loans amounting Rs 10,000- Rs 50,000 are ofen seen to be taken by people to meet the gap between expenses and income. Which means, in order to meet the "lifestyle" spending, usually these smaller loans are preferred by low income group individuals for short term duration.

Additionally, releasing the contents of the bi-monthly Monetary Policy Outcome in October, RBI Deputy Governor Shaktikanta Das had highlighted that, "Sector-wise, services and personal loans were the key avenues of bank credit deployment and their share in total incremental credit offtake rose in H1:2023-24 vis-à-vis the same period of the previous year. Personal loans and services credit contributed 37.7 per cent and 36.9 per cent, respectively, of incremental bank credit (y-o-y) in August 2023".

Citing surge in personal loans a cause for concern in RBI bullitein, Das had said, "...Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest."

Some experts opine that the central bank's cautious approach is espoused by the potential risks that the lenders may face owing to small ticket personal loans below Rs 50,000. The surge in delinquencies pertaining to repayment of this loans also add to further pressure for the banks.