MUMBAI - The Reserve Bank of India (RBI) is looking to tighten scrutiny on the unsecured lending portfolios of banks amid the growing risk of potential defaults, four banking sources told Reuters.

Unsecured loans – mostly personal loans and credit cards – do not carry any collateral and therefore pose a higher risk of default. These loans , however, are a big contributor to margins as they entail higher interest rates.

"Some action from the RBI on unsecured lending, credit cards, etc. could be seen," a senior source aware of the central bank's thinking said. "Excessive growth is the first sign of potential delinquencies."

None of the sources wanted to be named because they are not authorised to speak to the media.

"We can expect the RBI to increase risk weights on unsecured personal loans and credit cards and, or, float a discussion paper on how to monitor the space more efficiently," said the head of credit card vertical at a private sector bank.

As per RBI norms, the risk weights – or the capital that the banks need to set aside for every loan - on unsecured personal loans and outstanding on credit cards currently stands at 100% and 125%, respectively.

"The RBI has enough options with it for stricter vigilance," said a senior official at a large private sector bank. "We are bracing for tighter norms, it's a matter of time," the executive said.

The RBI did not immediately respond to an email seeking comment.

Indian banks have been expanding their unsecured lending portfolio as the pandemic-induced stress began easing.

Banks' outstanding on credit cards stood at 2 trillion rupees as of April. 21, up from 1.54 trillion rupees a year earlier, the latest RBI data showed.

Vintage delinquencies in April stood at 9% and 4% for personal loans and credit cards respectively, in the October-December quarter, compared with 5% each in the pre-pandemic period, per a TransUnion CIBIL report.

Vintage delinquencies are the percentage of accounts that are over 30 days past due in the six months from origination.

Collection efficiencies have also deteriorated for these loan products, the report showed.

The central bank has been asking lenders for data on the number of outstanding credit cards, value of transactions and collections every month for quite some time now, said a top official at the credit card unit of a public-sector bank.

The RBI has been cautioning banks on unsecured lending amid rising interest rates and high inflation, Reuters reported in April.

(Reporting by Siddhi Nayak and Swati Bhat; Editing by Dhanya Ann Thoppil)