Unsecured loans, market swings: Economic Survey 2025 has a word of caution for borrowers, investors

The Indian banking sector remains stable and well-capitalized, but rising stress in unsecured loans and global market volatility pose emerging risks, according to the Economic Survey 2025.

While the banking system’s gross non-performing assets (NPAs) hit a 12-year low of 2.6%, concerns are mounting over unsecured personal loans and credit card defaults. As of September 2024, 51.9% of new NPAs in retail loans originated from slippages in the unsecured loan book, raising red flags about financial stability.

Additionally, the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) December 2024 highlights that nearly half of personal loan and credit card holders also have larger secured loans, such as home or vehicle loans. A default on smaller loans can trigger delinquency risks across their entire credit portfolio.

In response to rapid credit expansion, the RBI increased risk weights on unsecured retail loans by 25 basis points in November 2023, aiming to curb excessive lending. Despite this move, the segment continues to grow, with housing loans remaining the largest contributor to credit expansion.

Credit growth, though still strong, has moderated in recent months due to a high base effect and regulatory tightening in sectors witnessing rapid growth. The Economic Survey also points to a credit-deposit mismatch, where credit expansion outpaces deposit growth.

Despite concerns in unsecured lending, the broader financial sector remains sound.

• Capital-to-risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) stands at 16.7%, well above regulatory requirements.
• Profit after tax (PAT) for SCBs surged by 22.2% year-on-year (YoY) in H1 FY25, reflecting improved operational performance.

Return on equity (RoE) and return on assets (RoA) also showed steady growth. The Economic Survey emphasizes that macro stress tests indicate banks can withstand adverse economic scenarios while maintaining capital adequacy.

While India’s financial system remains resilient, global market volatility could have ripple effects. The Survey cautions that any correction in the U.S. stock market could impact global financial conditions, potentially influencing Indian markets.

Active monitoring of international financial trends remains crucial, as external shocks could affect currency stability, inflation, and capital flows into India.