Indian banks have achieved notable success in reducing their overall gross non-performing assets (NPAs), which declined from ₹6.97 lakh crore (5.89% of advances) in March 2022 to ₹4.56 lakh crore (2.79%) by March 2024. However, this positive trend conceals a worrying development: a sharp rise in NPAs in personal loans and credit card portfolios.
Personal Loans: A Growing Concern
According to data from the Reserve Bank of India (RBI), NPAs in personal loans surged by 51% in just over a year, climbing from ₹7,422 crore (0.93% of advances) in March 2023 to ₹11,210 crore (1.16%) in June 2024. Alarmingly, within the three months leading up to June 2024, NPAs rose by ₹1,522 crore from ₹9,688 crore in March 2024. This increase highlights potential stress among borrowers, as personal loans are unsecured in nature and often carry high interest rates.
Credit Card NPAs: A Steep Climb
The situation is equally grim in the credit card segment. NPAs in this category rose by 136% over four years, from ₹2,404 crore (1.82% of advances) in March 2020 to ₹5,679 crore (2.04%) in June 2024. More recently, between March 2023 and June 2024, credit card NPAs increased by 39.46%, from ₹4,072 crore to ₹5,679 crore.
Credit cards, like personal loans, are unsecured and subject to exceptionally high interest rates—often ranging from 42% to 46% annually for overdue payments. This combination makes credit card debt particularly susceptible to default if borrowers are unable to manage their financial obligations.
Rising Borrower Indebtedness
The uptick in NPAs comes amidst an environment of growing credit card use in India. The value of credit card transactions tripled over three years, rising from ₹6.30 lakh crore in March 2021 to ₹18.31 lakh crore in March 2024. Monthly card spending now regularly exceeds ₹1.50 lakh crore, with September 2024 seeing a record ₹1.76 lakh crore.
Similarly, the number of credit cards issued has surged, reaching 10.61 crore in September 2024, up from 6.20 crore in March 2021. While these figures suggest a booming credit market, they also indicate an increasing risk of overleveraging by borrowers.
Regulatory Response and Risks
To address growing concerns, the RBI introduced measures in November 2023, raising the risk weight on bank exposure to consumer credit, credit card receivables, and non-banking financial companies (NBFCs) by 25%, up to 150%. This move was aimed at containing risks in these rapidly growing segments.
Despite these efforts, early signs of stress are also emerging in unsecured business loans, driven by competitive pressures, weak recoveries, and borrower overleveraging.
The Debt Trap Warning
Bank officials and financial experts caution that while incentives such as rewards, lounge access, and loan offers lure customers to credit cards, the high interest rates can quickly spiral into a debt trap for those unable to clear their dues within the interest-free period.
“Customers must understand that carrying forward dues beyond the interest-free period can lead to interest rates as high as 42%, making it difficult to escape the debt cycle,” a bank official warned.
A Balancing Act Ahead
While Indian banks have made commendable progress in reducing overall NPAs, the rising bad loans in unsecured retail credit signal a challenge that could undermine their efforts. Strengthening credit risk assessment and promoting financial literacy among borrowers will be critical to managing this growing risk.
As the economy continues to recover from the pandemic and consumer confidence rises, ensuring that this growth is sustainable and inclusive will require careful regulatory oversight and prudent lending practices.