Banks Revive Unsecured Lending as Rate Cuts Squeeze Margins, Asset Quality Stabilizes
India's banking sector is witnessing a strategic shift as lenders cautiously reopen the tap on unsecured lending, including personal loans and credit cards. This renewed focus comes at a critical juncture where policy rate cuts are exerting significant pressure on profitability margins, while asset quality shows signs of stabilization across the industry.
The Margin Pressure Driving Strategic Realignment
The Reserve Bank of India has implemented cumulative rate cuts totaling 125 basis points since February 2025, with the latest 25 basis point reduction occurring in December. This monetary policy easing has created a challenging environment for banks, as lending rates typically adjust more rapidly than deposit costs, directly impacting net interest margins.
According to the RBI's Report on Trend and Progress of Banking dated 29 December, banks' net interest margins moderated to 3.1% in 2024-25 from 3.3% in the previous fiscal year. The report further revealed that median NIMs remained highest for private banks, followed by foreign banks, while public sector banks exhibited relatively uniform margins with limited cross-bank variation.
Unsecured loans, which command higher yields due to their collateral-free nature, are increasingly being positioned as a strategic buffer against margin compression. India Ratings & Research noted in a 14 January report that while deposit repricing continues following the rate cuts, any meaningful improvement in net interest margins is likely to be delayed until the end of FY26 or early FY27, supported by liquidity-easing measures.
Selective Growth with Risk Management Focus
Banks are emphasizing that this renewed push represents a calibrated approach rather than a return to the aggressive expansion seen before the regulatory clampdown in November 2023. Growth strategies are being carefully recalibrated around tighter underwriting standards, sophisticated customer profiling, and controlled ticket sizes.
Several lenders have indicated during December-quarter earnings discussions that they are prioritizing salaried and affluent customers, particularly for personal loans and credit cards. This selective approach aims to limit delinquency risks while preserving the attractive yields that unsecured lending offers.
"The overall growth is slightly weaker and personal loan is one segment which also gives them a kicker on the yield side," explained Prakash Agarwal, partner at Geofin Capital. "There are many critical products on that side, and banks actually make quite a bit of risk-adjusted profit compared to a normal loan. So, this remains a fairly attractive product."
Bank-Specific Strategies and Performance Indicators
Leading private sector banks have demonstrated resilience in their margin performance during the December quarter. HDFC Bank posted an 8-basis point sequential improvement to 3.35%, while ICICI Bank maintained its margin at 4.3%. Lenders have guided that margins are likely to remain resilient in the March quarter, supported by several factors including a lag in deposit repricing, increasing share of low-cost CASA deposits, and more selective lending in higher-yielding segments.
ICICI Bank's management has expressed optimism about growing its cards and personal loans portfolios from current levels, despite intense competition. "We are quite positive on what we are underwriting and it's a question of leveraging our franchise to grow these businesses," said Anindya Banerjee, group chief financial officer at ICICI Bank, during a 17 January analyst call.
The bank's personal loan book grew 2.4% year-on-year and 1.7% sequentially in the December quarter, while its credit card portfolio declined 3.5% on year and 6.7% quarter-on-quarter. ICICI Bank attributed the decline to higher festive spending in the previous quarter, which led to significant repayments during the reporting period.
Public Sector Banks Adopt Targeted Approaches
Public sector banks are signaling even more targeted strategies in their unsecured lending initiatives. Punjab National Bank has launched a luxury metal credit card exclusively for customers with annual income above ₹30 lakh, reflecting the premium-focused approach gaining traction across the sector.
For personal loans, banks have indicated that fresh sourcing remains largely limited to salaried customers to safeguard credit quality. This cautious expansion follows a period of restrained growth after regulatory interventions in late 2023 forced lenders to rein in fast-growing personal loans and credit card portfolios.
Industry Trends and Growth Patterns
The renewed interest in unsecured lending comes after growth in unsecured retail credit slowed sharply from November 2023, when the RBI raised risk weights on such lending by 25%. The central bank cited unprecedented growth and the need to avoid a build-up of risk as primary reasons for the regulatory intervention.
For the banking sector overall, the share of unsecured loans in gross advances declined for the second consecutive year to 24.5% as of March 2025. Foreign banks maintained the highest share of unsecured advances, while the share of public and private sector banks has gradually converged in recent years, according to RBI data.
Personal loans grew 8.9% year-on-year to ₹16.3 trillion as of the end of November 2025, slower than the 11.2% growth recorded in the previous year. Growth in credit card outstanding slowed sharply to 2.4% year-on-year to ₹3 trillion in November 2025, from 18.1% a year earlier, according to the latest RBI data.
Several banks including Federal Bank, YES Bank, and AU Small Finance Bank have indicated plans to increase their share of higher-yielding unsecured loans to support margins. "I think we are not only comfortable, but whatever actions have been taken in terms of policies, and extending the collections, I think we are quite confident that we can grow this book in a very safe manner," said Prashant Kumar, managing director and chief executive officer of YES Bank, during the bank's Q3 earnings call.
Future Outlook and Industry Projections
With loan-to-deposit ratios no longer representing a binding constraint amid what banks describe as a more relaxed regulatory approach, early signs of acceleration are becoming visible. Macquarie Research noted in a 12 January report that system loan growth could rise from around 12% to 13-13.5% by the end of this fiscal year, driven primarily by retail and small-business lending.
The banking sector's strategic pivot toward selective unsecured lending represents a calculated response to evolving market conditions, balancing the need for yield enhancement with prudent risk management practices. As margins continue to face pressure from monetary policy decisions, unsecured lending is emerging as a crucial component of banks' profitability strategies while maintaining focus on asset quality preservation.
