Managing Retail Loan Growth and NPAs

Managing Retail Loan Growth and NPAs


After the bad loan crisis, banks reduced loans to industries and increased lending to the retail sector, including personal loans, credit card receivables, and housing loans.

  • Until the mid-2010s, banks gave massive loans to big industries, many of which turned bad and were revealed in a 2015 RBI review. By 2017, bad loans reached 10%.
  • Various debt recovery measures, including the Insolvency and Bankruptcy Code, 2016, were used to recover these loans.


GS-03 (Economy)


  • The retail loan sector grew rapidly, surpassing loans to industries and services. The GNPA ratio of personal loans decreased to 1.2% in March 2024, the lowest across sectors.
  • The RBI noted an increase in slippages from retail loans, excluding home loans, which formed 40% of fresh NPAs in FY24. This indicates a growing concern over the addition of new bad loans from the retail sector.
  • Delinquency levels among small borrowers with personal loans below ₹50,000 remain high, particularly with NBFC-Fintech lenders and small finance banks. Persistent delinquency could turn these accounts into NPAs.
  • While the overall banking system appears healthy, the RBI is worried about the increasing signs of stress in the retail loan segment, specifically slippages and high delinquency levels. The focus of concern has shifted from industries to individual borrowers.

What is a Non-Performing Asset (NPA)?

  • Definition: NPA refers to loans or advances that are in default or overdue on scheduled payments of principal or interest.
  • Classification: Loans are classified as non-performing if payments are overdue for at least 90 days.
  • Gross NPAs: The total amount of defaulted loans acquired by individuals from a financial institution.
  • Net NPAs: The amount realized after deducting provisions from the gross non-performing assets.

What is a Bad Bank?

  • Purpose: A bad bank is established to buy NPAs (bad loans) from banks to relieve their balance sheets.
  • Function: By removing bad loans, banks can lend more freely without the constraints of stressed assets.
  • Operations: After acquiring bad loans, the bad bank may restructure and sell these NPAs to interested investors.
  • Profitability: A bad bank can profit if it sells loans at a higher price than the purchase cost, though profit-making is secondary to easing the burden on banks and encouraging active lending.

Way forward:

  • Strengthen Regulatory Oversight: Implement stricter regulations for digital lending apps and NBFC-Fintechs to ensure responsible lending practices and prevent consumer exploitation.
  • Enhance Risk Management: Banks and financial institutions should improve their risk assessment and management processes for retail loans, particularly for small personal loans below ₹50,000, to identify and mitigate potential defaults early.
  • Financial Literacy Programs: Launch comprehensive financial literacy campaigns to educate consumers, especially younger and digitally savvy individuals, about the risks of excessive borrowing and the importance of responsible financial behavior.
  • Diversify Lending Portfolios: Encourage banks to balance their loan portfolios by diversifying their lending across different sectors, including industries, services, and retail, to reduce dependency on any single sector and spread risk.
  • Monitor and Adjust Policies: Continuously monitor the trends in slippages and delinquencies in retail loans and adjust lending policies accordingly. This includes timely intervention by the RBI to address emerging issues and ensure the stability of the financial system.