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NBFCs Overtake Banks in Personal Loan
Context
As per recent financial data, Non-Banking Financial Companies (NBFCs) increased their share in personal loan originations to 36.4% in FY25, overtaking both public and private sector banks.
Personal Loan Originations
- Refer to the process of onboarding customers for unsecured personal loans through due diligence, credit assessment, and KYC verification.
NBFCs' Rise:
- The NBFCs have captured a significant share (36.4%) in personal loan originations in FY25, up from 32.2% in FY24, driven by micro-lending in Tier-2 and Tier-3 cities and targeting small-ticket consumption loans.
Banks' Declining Share:
- Public Sector Banks (PSBs) and Private Sector Banks saw a decline in their share to 31% and 29.2%, respectively.
Structural Economic Shift:
- This trend reflects a shift toward a consumption-driven economy, where credit-led demand is replacing traditional savings-led demand in rural and semi-urban India.
Unsecured Lending Surge:
- NBFCs' credit books expanded at a CAGR of ~20% from FY22 to FY25, mainly driven by a 3x surge in unsecured lending, especially personal loans.
Regulatory Action by RBI:
- In November 2023, the RBI raised risk weights on personal consumption loans, credit cards, and NBFC lending to address financial stability risks due to rising unsecured loans.
- In February 2024, RBI rolled back higher risk weights on bank loans to NBFCs, but the tightened norms for unsecured loans remained in force.
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