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RBI has raised alarms over the increasing reliance on unsecured lending and private credit, calling for enhanced vigilance in its annual Trends and Progress of Banking in India 2023-24 report.
Key Highlights of RBI's Trends and Progress of Banking Report
Decline in NPAs: GNPAs reached a 13-year low of 2.7% in March 2024, further dropping to 2.5% by September 2024.
The Retail Loan Segment had the lowest GNPA ratio at 1.2% in September 2024, while agriculture loans had the highest GNPA ratio at 6.2%.
The GNPA ratios for education loans improved significantly, declining from 5.8% in March 2023 to 2.7% by September 2024, though they remain the highest among retail segments
Profitability: Banks' profitability continued to rise with return on assets (RoA) at 1.4% (first half of 2024-25) and return on equity (RoE) at 14.6% in FY24, marking six consecutive years of profit growth.
The NBFC sector exhibited double-digit credit growth, with improved asset quality and strong Capital Adequacy Ratios (CRAR).
The consolidated balance sheet of Scheduled Commercial Banks (SCBs) showed strong growth in credit and deposits, and Urban Co-operative Banks (UCBs) saw improvements in asset quality, capital buffers, and profitability.
Rising Share of Unsecured Loans: The share of unsecured loans in SCBs' total credit rose to 25.5% in March 2023 before slightly declining to 25.3% in March 2024.
In response, the RBI introduced stricter norms in November 2024, raising risk weights and setting exposure limits (maximum lending to a borrower or group).
The RBI also expressed concerns over top-up loans, often approved with minimal due diligence and lax adherence to guidelines, with reports of misuse, including redirection to the stock market.
In 2023, the RBI mandated top-up loans against depreciating movable assets to be treated as unsecured loans.
Rise of Dark Patterns: The report highlights concerns over dark patterns, the Central Consumer Protection Authority (CCPA) issued guidelines to regulate such practices
RBI is evaluating the prevalence of dark patterns among regulated entities (REs).
High Employee Attrition: Employee attrition (employees leaving organizations) rates have surged to 25% in the past three years
It is raising concerns about operational risks such as service disruption, loss of institutional knowledge, and higher recruitment costs.
Slippage Ratio: The slippage ratio improved in 2023-24. For the third consecutive year, private sector banks (PVBs) had a higher slippage ratio than public sector banks (PSBs) due to larger fresh accretions to NPAs in PVBs.
Key Terms
Return on Assets (RoA): Measures a business's profitability relative to its total assets.
Return on Equity (RoE): Measures a company's annual return (net income) relative to its total shareholders' equity.
Capital Adequacy Ratios (CRAR): Measures a bank's ability to absorb losses and ensure stability, protecting depositors and promoting financial system efficiency.
Slippage Ratio: Measures new accretions to NPAs as a share of standard advances at the beginning of the year.
Dark Patterns: These are unethical user interface (UI)/user experience (UX) tactics designed to deceive users into actions they don't intend, benefiting the company.
These practices limit user control and transparency, such as hidden costs, difficult cancellation options, misleading ads, or auto-charging after free trials.
Examples: Fake countdowns, disguised ads, and forced account creation for transactions.
Impact of Rising Unsecured Loans on India's Economy
Higher Default Rates and Financial Stress: As more unsecured loans are issued, the risk of defaults rises, leading to increased non-performing assets (NPAs) and financial strain on banks and NBFCs.
Inflationary Pressure: Rising defaults and higher interest rates reduce disposable income, curbing discretionary spending, increasing inflation, and slowing economic growth.
Effect on Consumers: For consumers, the availability of unsecured loans can provide easier access to credit.
However, it also means higher interest rates and potential debt traps if not managed responsibly
Rural and Urban Impact: Both rural and urban consumers face financial instability due to the rise in high-cost loans, contributing to lower consumer confidence.
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