The Reserve Bank of India (RBI) has issued a cautionary note on mounting pressure within the unsecured lending segments of private sector banks. According to the central bank's Financial Stability Report (FSR) for December 2025, while the overall asset quality across the banking system appears steady, fresh slippages and write-offs in unsecured retail loans remain alarmingly high. This development follows a sharp deceleration in unsecured retail credit growth, which had previously fueled bank lending in the post-pandemic years, after the RBI tightened risk norms in November 2023.
Asset Quality: A Tale of Surface Stability and Underlying Stress
The RBI report reveals a nuanced picture. On the surface, the gross non-performing assets (GNPA) ratio for scheduled commercial banks (SCBs) stands at a stable 1.8% for overall advances, compared to 1.1% specifically for retail loans. However, digging deeper uncovers significant stress points. Fresh slippages in unsecured retail loans made up a substantial 53.1% of all retail loan slippages for SCBs. This indicates that a majority of new bad loans in the retail segment are originating from unsecured products like personal loans and credit cards.
The central bank had previously flagged similar concerns in its December 2024 report, highlighting higher write-offs in unsecured lending by private banks. In a contrasting trend for non-banking financial companies (NBFCs), the headline asset quality has shown improvement with declining GNPA ratios. Yet, the RBI sounded a note of caution, pointing out that fresh accretions to NPAs are rising and write-offs are increasing within NBFCs, signaling a gradual build-up of stress in their loan books as well.
Credit Growth Contraction and Soaring Costs in Microfinance
The report sheds particular light on the microfinance sector, which is experiencing a significant credit contraction. Credit extended to the microfinance sector by NBFCs and NBFC-Microfinance Institutions (NBFC-MFIs)—which constitutes over half of the total sectoral credit—contracted by 8.5% in the first half of the fiscal year 2025-26.
Although stressed assets in microfinance have declined for three quarters in a row, the credit costs for NBFC-MFIs have skyrocketed. These costs surged to 15.5% in September 2025, a dramatic increase from 4.4% just two years earlier. This spike is attributed to higher provisioning requirements and increased write-offs, reflecting the underlying pressure in the segment.
Borrower Overlap and Silver Linings
Adding to the risk profile is the high level of borrower overlap. The RBI noted that nearly half of the individuals taking credit cards and personal loans already have another existing loan, often a high-value commitment like a home or vehicle loan. This concentration of debt raises concerns about repayment capacity during economic stress.
Amid these warnings, the report identified areas of resilience. Strong growth in gold loans and unsecured business loans offers some counterbalance for financial stability. The RBI clarified that most of this debt is held by low-risk, high-quality borrowers. The report stated that in both banks and NBFCs, higher-quality borrowers dominate the unsecured business loans category, providing a buffer against systemic risk.
The December 2025 FSR ultimately paints a picture of a financial system where stability at the aggregate level masks pockets of growing strain, particularly in the high-growth, high-risk unsecured lending space that expanded rapidly after the pandemic.
