The Reserve Bank of India (RBI), in its December 2025 Financial Stability Report (FSR), has cast a spotlight on an increasingly bifurcated credit landscape, revealing pockets of mounting stress within the unsecured lending portfolios of private sector banks and non-banking financial companies (NBFCs). While the overarching indicators suggest a stable financial system, with aggregate gross non-performing assets (GNPA) ratios remaining contained, the central bank’s detailed analysis points to a worrying acceleration in fresh slippages and write-offs, particularly within high-growth, unsecured credit segments. This nuanced picture underscores the challenges regulators face in balancing credit expansion necessary for economic growth with the imperative of maintaining systemic resilience.
The recent FSR highlights that despite overall asset quality appearing robust—with a GNPA ratio of 1.8% for scheduled commercial banks (SCBs) and 1.1% for retail advances—the underlying dynamics are shifting. A significant concern is that unsecured retail loans alone accounted for a substantial 53.1% of the total retail loan slippages reported by SCBs. This statistic is particularly telling, indicating that while the total volume of bad loans might be manageable, a disproportionate share of new delinquencies originates from the riskier, uncollateralized segments of personal credit, such as credit cards and personal loans. The RBI had previously flagged similar concerns regarding higher write-offs in unsecured lending among private sector banks in its December 2024 report, suggesting a persistent and evolving challenge rather than an isolated incident.
The surge in stress within unsecured retail lending follows a period of aggressive growth in this category, which significantly boosted bank credit expansion in the years immediately after the COVID-19 pandemic. Faced with escalating risks, the RBI intervened in November 2023 by tightening risk norms, specifically increasing the risk weights on unsecured consumer credit and bank lending to NBFCs. This regulatory recalibration was designed to temper the rapid pace of growth and encourage more prudent underwriting practices. Post-intervention, the growth in unsecured retail lending has indeed decelerated sharply, reflecting the intended impact of the regulatory measures. However, the sustained high levels of slippages and write-offs indicate that the underlying credit quality issues predated the tightening and are now manifesting more clearly as borrowers face higher interest rates and economic pressures.
Unsecured loans, by their very nature, carry higher inherent risks for lenders due to the absence of collateral. While they offer banks and NBFCs attractive yields, they also expose them to greater losses in the event of default. The substantial proportion of slippages from this segment suggests that a material portion of these loans, extended during the credit boom, might have been granted to borrowers with weaker repayment capacities or those susceptible to economic shocks. For banks, particularly private sector institutions that had aggressively expanded their retail loan books, managing these rising delinquencies necessitates increased provisioning, which can impact profitability and capital adequacy.
Beyond traditional banks, the NBFC sector, a critical component of India’s financial architecture, also presents a complex scenario. The FSR notes an improvement in headline asset quality for NBFCs, with gross non-performing assets ratios declining overall. This aggregate improvement, however, masks a more concerning trend: fresh accretions to NPAs are on the rise, and write-offs are increasing. This divergence signals a gradual build-up of stress within specific loan portfolios, suggesting that while older bad loans might be getting resolved or written off, new ones are emerging at a faster pace. The write-offs, while cleaning up balance sheets, represent actual losses that impact the financial health of these institutions.
The microfinance segment, predominantly served by NBFCs and NBFC-microfinance institutions (NBFC-MFIs), exemplifies this underlying stress. Credit extended to the microfinance sector from NBFCs and NBFC-MFIs, which constitutes over half of the total sectoral credit, contracted by a significant 8.5% in the first half of the 2025-26 fiscal year. This contraction suggests a more cautious approach by lenders or reduced demand from borrowers, possibly due to over-indebtedness. While stressed assets in the microfinance segment have declined for three consecutive quarters, indicating some resolution of legacy issues, the credit costs for NBFC-MFIs have surged dramatically. From 4.4% two years earlier, these costs escalated to 15.5% by September 2025, driven by higher provisioning and write-offs. This sharp increase in credit costs erodes profitability and limits the capacity of microfinance institutions to extend further credit, potentially impacting financial inclusion goals.
A key factor contributing to the heightened risk in unsecured lending is the increasing prevalence of multiple loan exposures among borrowers. The FSR reveals that nearly half of the individuals availing themselves of credit cards and personal loans already have another loan outstanding. While some of these "other" loans might be high-ticket, secured obligations like home or vehicle loans, indicating a financially disciplined borrower base, the sheer volume of individuals with multiple unsecured exposures raises concerns about potential over-leverage. In an environment of rising interest rates and persistent inflation, managing multiple debt obligations can become challenging, increasing the likelihood of default, especially on discretionary or uncollateralized credit. This phenomenon echoes patterns observed in developed economies during credit booms, where easy access to multiple credit lines can quickly lead to a debt spiral for vulnerable borrowers.
Despite these emerging pressures, the FSR also identifies areas of resilience within the broader credit market. Strong growth in gold loans and certain categories of unsecured business loans offers a measure of relief for financial stability. Gold loans, being fully collateralized, inherently carry lower credit risk. Their growth suggests a demand for credit that can be met through secured channels, providing a safer avenue for both lenders and borrowers. Similarly, the report notes that in both banks and NBFCs, the outstanding loans held by "higher quality borrowers" dominated the unsecured business loans category. These are typically businesses with robust financials, strong credit histories, and established operational cash flows, making their unsecured exposures less risky compared to broad-based retail unsecured lending. This distinction highlights that not all unsecured credit carries the same risk profile, and careful differentiation is crucial for effective risk management.
Market analysts and economists generally concur with the RBI’s cautious stance, acknowledging that while India’s overall macroeconomic fundamentals remain strong, pockets of vulnerability must be actively managed. The country’s robust economic growth, projected to be among the fastest globally, provides a buffer. However, the rapid expansion of retail credit, particularly unsecured, in recent years necessitates ongoing vigilance. Some experts suggest that the RBI’s proactive measures, such as increased risk weights, were timely interventions to prevent a more significant build-up of systemic risk. Had these steps not been taken, the current levels of slippages and write-offs could have been far more substantial, potentially impacting the wider financial system.
Looking ahead, the RBI’s continued focus on data-driven monitoring and its readiness to implement further calibrated policy measures will be crucial. Financial institutions, in turn, are expected to reinforce their credit underwriting standards, enhance their early warning systems for identifying stressed assets, and bolster their provisioning buffers. There might be a strategic pivot by some lenders towards more secured lending products or a greater emphasis on assessing the holistic debt burden of potential borrowers. For consumers, the tightening credit environment, while potentially restricting access to easy loans, could foster greater financial prudence and discourage over-indebtedness, ultimately contributing to a healthier credit culture in the long run. The journey towards a resilient financial system is dynamic, requiring continuous adaptation and foresight from both regulators and market participants to navigate the complexities of evolving credit cycles.
