Economic Survey 2025 flags risks of unsecured loans, market volatility for borrowers and investors

synopsis

Despite a stable and well-capitalised banking sector, rising stress in unsecured loans and global market volatility pose emerging risks, the Economic Survey 2025 has cautioned. While gross non-performing assets (NPAs) in Indian banks have dropped to a 12-year low of 2.6%, the growing burden of unsecured personal loans and credit card defaults has raised concerns over financial stability.

According to the Economic Survey, as of September 2024, 51.9% of new NPAs in retail loans stemmed from defaults in unsecured loans, marking a critical stress point.

The Reserve Bank of India's (RBI) Financial Stability Report (FSR) December 2024 highlights another worrying trend: nearly half of personal loan and credit card borrowers also hold larger secured loans such as home or vehicle loans. A default on smaller loans could trigger a domino effect, impacting their entire credit portfolio.

In an attempt to curb excessive lending, the RBI raised risk weights on unsecured retail loans by 25 basis points in November 2023. However, despite regulatory tightening, the segment continues to expand, with housing loans remaining the largest contributor to overall credit growth.

While credit growth remains strong, recent months have seen some moderation due to regulatory measures and a high base effect. The Economic Survey also flagged a credit-deposit mismatch, where credit expansion is outpacing deposit growth—an issue that could strain liquidity in the long run.

Despite concerns in the unsecured lending space, India's financial system remains resilient, the survey noted. 

The survey also pointed that macro stress tests indicate banks can withstand adverse economic conditions while maintaining capital adequacy.

While India's financial sector remains fundamentally strong, the Economic Survey cautioned that global market fluctuations could have a ripple effect. A potential correction in the US stock market or shifts in global liquidity could impact financial conditions worldwide, influencing the Indian market.