Are Indian banks underestimating the unsecured loan problem?

0:00Hello folks, you're tuned into Finshark's Daily. In today's episode, we look at whether India's easy credit boom is starting to show cracks. And also, here's a quick side note before we begin. This weekend, we're hosting a free two day insurance masterclass that helps you build real financial security by understanding both health and term life insurance the right way. If you'd like to book your free seat, then you can do so by heading to the link in the description and registering. Alright, let's get on to today's story. A few years ago, getting a loan meant paperwork, approvals and waiting. But today, it only takes a few minutes. A credit card getting approved instantly, personal loans are issued with a few taps and by now, bail later options are almost everywhere. Access to credit has never been easier than now. And in a way, it's a good thing. More access to credit means more consumption, more spending, and ultimately, more growth for the economy. It also brings first time borrowers into the formal financial system away from informal

1:00money lenders. Ultimately, this gives people the flexibility to manage short term needs without dipping into savings. Banks and NBC's have also actively pushed these products because they are high margin require no collateral and scale easily through digital channels. Let's take credit cards, for instance. The number of cards approved has been steadily increasing over the last few years. In FI-12 to FI-25, the number of active credit cards searched almost 5X. And by the end of December 24, there were over 100 million active credit cards in India. And this is just the credit cards, by the way. People have other kinds of loans as well. So as the saying goes, too much of a good thing can also be a bad thing. Because when credit becomes this easy to access, it also becomes easy to overuse. And when millions of borrowers start taking on small loans at the same time, the risks don't show up immediately, they build up slowly in the background. And that's exactly what makes the current situation worth paying attention to. The RBI has already flagged the strength. It has tightened norms by increasing risk weights on unsecured loans, meaning banks have

2:01to set aside more capital for every rupee they lend. Yet, despite these signals, credit growth in the segment has continued. Which raises a natural question, why are lenders still dispersing more loans? To understand that, it helps to look at how credit cycles typically unfold. In the early stages of credit cycle, everything appears stable. Lending grows quickly, defaults remain low and repayment behaviors look strong. This creates confidence within the systems and banks expand further. In this stage, new borrowers enter the market and credit becomes easier to access. But as we mentioned earlier, risks in unsecured lending tend to build slowly. The true risk emerges 18 to 36 months after the loan is dispersed. Credit card NPAs, that is not performing assets, which is essentially where card holders have failed to make interest or principal repayments have jumped by about 7.3% in FI-22 and another 28% in FI-24. And what this indicates is that loans originated 2 to 3 years ago are now cracking on distress. This is because, unlike secured loans, there is no asset backing these loans.

3:04Repayment depends entirely on borrowers in gum. And when credit grows too fast, especially among first time borrowers, risks slowly begin to build in the background. So when that stress starts to emerge, it often does so quickly, because multiple borrowers begin to struggle at the same time. There are early signs of that stress beginning to show now. Retail lending, once considered one of the safer segments of banking, is now under pressure at the margins. Many first time borrowers are managing multiple loans, often across different lenders. At the same time, banks themselves are facing changing conditions. Deposit costs have been rising, which compresses margin, regulatory scrutiny has increased, growth while still strong is becoming more expensive to sustain. Several banks have begun tightening their approach to unsecured lending, following the RBI's warning. Credit card issuers, for instance, are recalibrating their customer base. Rewards are being reduced, fees are being adjusted, and low value or high rescuers are being gradually discouraged. The focus is shifting toward retaining high-spending, low-risk customers who are more profitable

4:05and less likely to default. A similar shift can be seen in areas other than credit cards too. Like IDFC First Bank, as an example, the bank is aggressively degrowing its microfinance portfolio, that is MFI portfolio, with its share of the total loan book falling from 6.6% and March 24 to 2.4% by December 25. One can argue that this withdrawal is a response to the over-indetness of rising and pays seen across the MFI sector in late 24. These kinds of withdrawal suggest that lenders are not ignoring the risks, which is a good sign. However, the central tension is still unchanged. Banks continue to bet that strong economic growth will support repayments, and as long as incomes rise and employment remains stable, borrowers can continue servicing their loans. But if income growth does not keep pace with borrowing, or if households stretch themselves to thin, stress can build quickly. But once a borrower defaults, recovery rates tend to be lower compared to secured loans, and that makes the system more sensitive to changes in borrower behavior.

5:06The concern, therefore, is not about immediate crisis. India's banking system today is far more resilient than it was in the past. Banks' NPAs have declined from the earlier peaks. They hold better capital buffers, and regulatory oversight is stronger. But the nature of risk is also evolving. Instead of large corporate defaults, the next phase of stress could be driven by small household loans. If defaults start rising, lenders may respond by tightening credit further, and since much of today's spending depends on easy credit, this could slow consumption. So what begins as a financial sector adjustment can spill over into the broader economy. So how can you, as a retail customer, come out ahead in this potential crisis? First, treat easy credit like a trap, not a privilege. Just because your limit increases or a new card is instantly approved doesn't mean you should use it. Use it only if you need it. Banks expanded their loan book aggressively when money was cheap. Now that they're tightening, you don't want to be caught over leveraged when tight turns. Second, optimize for benefits while they still exist. The banks are cutting rewards and increasing fees.

6:08The smartest move is to actively evaluate your cards and accounts. Keep the ones that give you real value and don't use the ones that don't. Third, protect your credit profile. As banks become more selective, high quality borrowers will get better terms while everyone else gets priced out. Paying on time, keeping utilization low and avoiding unnecessary loans will ensure you stay in the profitable customer bucket. And finally, build your own safety net. If banks are preparing for potential slowdown, maybe you should too. A solid emergency fund and lower dependence on credit can give you flexibility when lending titans or cost rise. Because in every credit cycle, the winners are in the ones who borrow the most, they're the ones who borrow only when they need to. Alright folks, I will see you in the next one. Until next time...