Why RBI should plan stricter rules for unsecured digital lending

It is time for the Reserve Bank of India (RBI) to focus on unsecured personal loans and caution banks and lenders about the risks of a rapidly growing retail credit segment that lacks

adequate collateral. While the demand for such loans remains robust, particularly among younger borrowers, such lending practices must be profoundly regulated.

The RBI has previously raised red flags over the sustainability and prudence of current lending practices.

According to RBI data released on April 30, credit to the personal loans segment grew 14% year-on-year as of the fortnight ending March 21.

The RBI should look at the potential vulnerabilities, particularly in the wake of a sharp surge in unsecured credit over the last two years. In March 2023, for instance, credit in this

segment had jumped 25.5% year-on-year, prompting the RBI to hike risk weights on consumer credit from 100% to 125% in November the same year.

Interestingly, public sector banks have adopted a relatively conservative stance, scaling back exposure to unsecured credit. Their share in total credit declined to 53.1% as of June 2024,

down from 55.8% a year ago, but the exposure to unsecured lending is still high. In contrast, private sector banks have emerged as the most aggressive lenders in this segment.

Multiple reports have stated that private sector banks have been more aggressive in expanding their unsecured loan portfolios. Between March 2021 and June 2024, the share of private banks in

total bank credit rose from 36.5% to 46.9%, highlighting their rapid growth in lending activities."

However, one should understand that the divergent strategies of PSBs and private banks in unsecured lending reflect their differing risk appetites and responses to regulatory guidance.

A senior expert said, “The RBI is not looking to curb credit growth, but it is keen on ensuring that growth doesn’t come at the cost of financial stability.”

Unsecured loans such as personal loans, credit card borrowings, and small digital loans are characterised by the absence of collateral, making them riskier for lenders. A spike in defaults

can lead to a swift deterioration in asset quality, something the RBI aims to to avoid.

Kunal Varma, CEO and co-founder of the digital lending platform Freo, noted, “As unsecured personal loans expand rapidly, it is expected that the RBI will review risk management practices

and systemic stability soon. The demand is primarily driven by younger borrowers. Responsible underwriting and transparency will help build long-term trust in the ecosystem.”

He further emphasised the need for simple, transparent disclosures that borrowers can easily understand. “If the regulator tightens norms, it could lead to a more stable and

borrower-friendly environment.”

The ease of access to loans via digital APIs (Application Programming Interface) has played a major role in fuelling the growth of unsecured loans, particularly in ticket sizes under

₹50,000. However, this has also led to concerns around impulsive borrowing, with many users juggling multiple EMIs without fully understanding their repayment obligations.

Siddarth Jain, CFO at MinEmi, highlighted the need for stricter thresholds. “The RBI’s move to tighten norms is a much-needed step. Lending needs to be aligned with a borrower’s credit

profile and existing obligations. A more disciplined lending framework can protect both banks and borrowers from long-term distress.”

Jain also pointed out that this shift may encourage more secured borrowing through products like Loan Against Property (LAP) or Loan Against Securities (LAS), which carry lower interest

rates and are inherently more stable for the financial ecosystem.