RBI red flag: 10% retail debtors missing EMIs

This is easily one of the worst early warning signals that the authorities of banks, financials and economic policymakers can apprehend. The Reserve Bank of India (RBI) has said that about 10% of the retail borrowers are regularly missing their EMIs but are just managing to stave off the non-performing asset stamp by scrambling to pay some amount before the mandatory 90-day deadline passes.

The Economic Times has flagged the issue quoting the latest financial stability report from the RBI.

Inflation & repayment
RBI has also underscored the direct correlation between inflation and timely servicing of loans. In its report, the central bank has stated that if the headline inflation crosses the ceiling of 6%, it jeopardises the ability to repay loans for many families. A higher rate of inflation immediately translated into higher expenditure towards the basic necessities of a family, thereby reducing its ability to service debt.

The issue becomes all the more important since retail loans are becoming increasingly more important in the credit portfolio of most banks and NBFCs. In the past few years, the growth in retail loans has far outstripped the rate of growth in total loan portfolio. Between March 2021 and March 2023, retail loans galloped at 24.8% while gross advances grew at only 13.8%.

No immediate danger
RBI has, however, said that the early warnings to not imply that there is immediate danger of any systemic risk of the banking sector.

“Although the gross non-performing ratio of retail loans at the system level was low at 1.4% as of March 2023, the share of ‘special mention accounts’ was relatively high at 7.4% for scheduled commercial banks (SCBs) and it accounted for a tenth of their retail assets portfolio,” said the RBI report.

There are three sub-categories in a loan portfolio that is designed to categorise the risk factor. The first is a (special mention account) SMA-0 which denotes that the EMI is delayed but not overdue for more than 30 days. If the principal or interest payment is delayed between 30 and 60 days, the account enters the SMA-1 category. SMA-2 category is reserved for those where the delay is between 60 and 90 days. Beyond 90 days, the account is declared an NPA.

Zooming unsecured loans
RBI has another concern – the rate of growth of unsecured loans has exceeded the growth of secured loans. In the past, RBI has issued overall caution about the fast growth of unsecured loans.

A sensitivity analysis by the central bank demonstrated that there is an apprehension of a rise of 9 percentage points in the number of loans at risk and a 8 percentage points rise in debt at risk under various scenarios where inflation rises beyond the ceiling of 6%.

“Households with EMI-to-income ratio of more than 60% are more at risk of a negative financial margin,” said the RBI report. A family’s financial margin is defined as income after the deduction of applicable taxes, EMI on housing loan and expenditure on essential items.