Loans With No Collateral; Biggest Problem For The Indian Banking Sector

In recent years, India’s banking sector has grappled with the challenge of unsecured loans, personal loans, credit-cards, micro-finance and small-ticket lending without collateral. With the legacy of corporate bad-loans largely addressed, attention turned to unsecured segments which appeared more vulnerable. 

Yet now the trend shows signs of easing: stress levels are abating, provision buffers are stronger, and lenders are gaining relief. This article examines that evolution, the current state, and what it means for banks and borrowers alike.

The driver of stress in unsecured lending

Unsecured lending by banks and non-bank financial companies (NBFCs) grew rapidly in the post-pandemic era, driven by robust consumption, digital credit platforms and low underwriting intensity. Analysts flagged unsecured personal loans and credit-cards as emerging risk sectors. The unsecured portion remains a smaller share of total advances (around 10 %), but because of higher yields and weaker collateral, the risk-reward dynamics differ.

Lenders tightened rules under regulatory pressure—higher risk-weights, elevated capital buffers and moratoria for NBFCs. For example, the Reserve Bank of India cautioned against “growth-at-any-cost” in unsecured lending. 

As a result, the incidence of slippages (loans turning bad) in unsecured segments rose in pockets, though headline gross non-performing asset (GNPA) ratios improved. Public sector banks (PSBs) and private banks exhibited differing patterns of exposure and stress. The following table summarises estimated changes in slippages and distressed loan incidence.

Select indicators of stress in unsecured lending

This table summarises key metrics of stress seen in unsecured portfolios across lending institutions.
 

These figures indicate that while unsecured-loan stress remains, the major wave of risk appears mitigated. Lenders have absorbed much of the legacy exposure, and fresh slippages currently, though measurable, are not overwhelming.

Why lenders are finding relief

There are several reasons why banks are experiencing relief in unsecured-loan stress. First, much of the high-risk exposure from earlier years has already been cleaned up via write-offs, restructuring and recovery. 

This legacy cleanup has shrunk the pool of vulnerable accounts. Second, lenders have maintained higher provisioning and coverage ratios, giving them buffers against potential bad loans. Third, the economy has held up reasonably well with steady consumer demand, which supports repayment capacity in retail portfolios.

For example, lenders have pivoted to secured-loan segments (mortgages, auto) and cautious unsecured growth rather than aggressive expansion. This risk-selective strategy is paying off. Also, the regulatory environment remains vigilant, higher risk-weights for unsecured exposures, and closer monitoring of NBFCs and micro-finance firms

Table 2: Key relief-factors for lenders
 

After the table: These relief-factors explain why banks are currently in a better position, not because unsecured stress has vanished entirely, but because the structural environment and capital buffers have improved.

Risks that still warrant caution

Despite the relief, unsecured-loan risk has not disappeared. Analysts at rating agencies have warned that personal loans, credit-cards and micro-finance segments continue to harbour vulnerabilities—especially as interest rates remain elevated and borrowers’ leverage edges up.

In addition, some private banks with greater exposure to unsecured portfolios are more susceptible than PSBs. The slippage ratio for private banks in Q1 FY26 rose sharply compared to PSBs.

Macro risks—such as slowing consumption, inflationary pressures, job-market stress or global shocks—could trigger repayments to unravel. Therefore, banks cannot relax vigilance. Underwriting standards, monitoring of borrower indebtedness and diversification of exposures remain key.

Outlook and implications

Looking ahead, analysts expect credit growth in India to strengthen (to ~12 % YoY by FY26), driven by retail and unsecured segments, albeit cautiously. If asset-quality remains benign, further expansion of unsecured loans could offer banks higher yields and improved returns on equity.

However, success hinges on maintaining underwriting discipline, keeping coverage ratios robust and remaining alert to early signs of stress. The relief that lenders are experiencing is valuable, but it may not be permanent if complacency sets in. The next phase is to convert this relief into a sustainable cycle of responsible unsecured lending growth, without re-igniting systemic risk.

Conclusion

In summary, the Indian banking sector’s unsecured-loan stress is visibly abating. Legacy risk has been absorbed, provision buffers are healthier, asset-quality metrics have improved and lenders enjoy a more favourable environment. At the same time, the unsecured segment remains a frontier of potential risk and growth. The balance going forward hinges on disciplined growth, strong capitalisation and rigorous risk-management. For lenders and regulators alike, the current “relief” is an opportunity — but not a reason for complacency.
 

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.