PSBs’ Sub‑Prime Lending Rises With Govt Backing
Public sector banks (PSBs) in India are seeing a steady rise in sub‑prime lending, driven by increased reliance on government-backed credit guarantee schemes. These loans are primarily extended to micro, small, and medium enterprises (MSMEs), startups, and low-income individual borrowers who typically lack sufficient collateral or formal credit history.
Credit Confidence Due to Government Support
With support from government schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and similar initiatives, banks are now more confident to lend to higher-risk segments. These guarantees partially cover defaults, encouraging PSBs to expand credit even in sectors previously seen as too risky.
Officials say that this model is helping push financial inclusion by expanding formal lending access to sectors that were earlier dependent on informal sources.
Risk Management Measures in Place
Although sub-prime loans offer higher interest margins, they also come with greater chances of defaults. To manage this, banks are enhancing due diligence, monitoring repayment cycles more closely, and using early-warning systems to flag risky accounts.
Banks also highlight that many of these loans are backed by revised underwriting standards and are tied to performance-linked repayment incentives that encourage timely payments.
Economic Impact and Watchful Oversight
The increased credit availability has helped MSMEs scale operations, improve cash flow, and support employment. However, regulatory authorities including the Reserve Bank of India (RBI) are keeping a close watch on any possible spike in non-performing assets (NPAs) resulting from this trend.
Industry experts believe the real test will be in the next two to three quarters, as some of these loans mature and repayment patterns emerge.
What’s Ahead
With the government expected to extend and expand its credit guarantee coverage in the upcoming fiscal year, PSBs are likely to continue offering sub-prime loans more actively. The challenge will lie in maintaining a balance between credit growth and financial discipline to ensure long-term stability in the banking sector.
