Indian banks have touted their success in reducing non-performing assets (NPAs), or loans defaulted by borrowers, over the past two years. However, a closer look reveals an uneasy trend: a significant rise in NPAs within the personal loan and credit card segments. This spike coincides with a worrying increase in borrower indebtedness, casting a shadow over the sector’s progress.
NPAs in the personal loans segment have gone up by 51 per cent from Rs 7,422 crore, or 0.93 per cent of advances, in March 2023 to Rs 11,210 crore (1.16 per cent) in June 2024, the Reserve Bank of India (RBI) said in its reply to a Right to Information (RTI) request filed by The Indian Express. The quantum of rise in NPAs in the three months up to June 2024 was even higher by Rs 1,522 crore from Rs 9,688 crore in March 2024, RBI data shows.
This has happened at a time when banks managed to bring down overall gross NPAs from Rs 6.97 lakh crore (5.89 per cent of advances) in March 2022 to Rs 4.56 lakh crore (2.79 per cent) by March 2024.
According to RBI data, credit card NPAs have shot up by 136 per cent from Rs 2,404 crore (1.82 per cent of advances) since March 2020 to Rs 5,679 crore (2.04 per cent) by June 2024. NPAs in the credit card segment rose by 39.46 per cent from Rs 4,072 crore in March 2023 by June 2024.
Both personal loans and credit card outstanding are unsecured in nature and carry high interest rates. A loan account becomes an NPA when the interest or principal instalment is more than 90 days overdue.
Your Right to Know: Banks report spike in bad loans in personal loans, credit cards
When a customer delays repayment of his credit card bill beyond the billing cycle, the bank charges a high interest rate of 42-46 per cent interest per annum on the outstanding dues and his credit score also plummets.
In November 2023, the RBI had increased risk weight on the exposure of banks towards consumer credit, credit card receivables and non-banking finance companies (NBFCs) by 25 per cent up to 150 per cent. The move was aimed to address build-up of any risks in these segments. “Even as inquiry volumes remain robust, the impact of increase in risk weights on certain segments of consumer credit pulled down the rate of growth in overall consumer credit, especially personal loans and credit cards,” the RBI’s FSR report said.
The unsecured business loans segment has started showing early signs of stress in asset quality, possibly due to the increasing competitive intensity among lenders, continuing pressure on cash flows in certain end-borrower segments, on-field attrition, lower-than-expected recoveries leading to higher write-offs and overleveraging of borrowers, India Ratings said in a report.
Credit card use is rising rapidly in the country if the customer spends through this route, are any indication. The value of credit card transactions tripled in the last three years to Rs 18.31 lakh crore during the year ended March 2024 from Rs 6.30 lakh crore in March 2021 with the economy coming out of the problems created by the Covid pandemic and consumer confidence increasing steadily over the last several quarters.
The value of credit card transactions rose from Rs 6.30 lakh crore to Rs 9.71 lakh crore during the year ended March 2022 and Rs 14.32 lakh crore as of March 2023, according to Reserve Bank of India data. The monthly spends by card users are now above Rs 1.50 lakh crore and remained at Rs 176,202 crore in the month of September this year. It was Rs 72,319 crore in March 2021.
The number of credit cards issued by banks also rose rapidly to 10.61 crore as of September 2024 from 9.3 crore in September 2023, 7.36 crore in March 2022 and 6.20 crore in March 2021, RBI data shows.
However, credit card outstanding has gone up to Rs 281,392 crore as of October 2024 as against Rs 249,635 crore in 2022. Card outstanding is the amount due from customers after the interest-free period offered by banks.
What have lured customers to the credit card segment are incentives like rewards on higher spending, loan offers and lounge benefits. “Customers should realise that if they keep card dues beyond the interest-free period, they end up paying an interest rate of up to 42 per cent in some cases. It will put them in a debt trap,” said a bank official.
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