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The Reserve Bank of India (RBI) in its 'Trends and Progress of Banking in India' report for FY22 has said that retail loans, long considered a panacea for the banking system, may become a systemic risk. The central bank, however, was quick to add that it is well-equipped with its policy toolkit to handle any systemic risk that may arise.

RBI stated that empirical evidence suggests that a build-up of concentration in retail loans may become a source of systemic risk. It can be noted that in the recent past, banks – which faced huge loan reverses on the large exposure front – had switched focus towards the retail assets building front to avoid any major reverses in asset quality as done after the asset quality review. The report said in recent years, Indian banks appear to have displayed a herding behaviour in diverting from the industrial sector towards retail loans, and the decline was evident across all groups of banks, including state-owned, private and foreign.

The report explained that 'systemic as a herd' refers to a phenomenon when institutions which are not individually systemically important behave in a way similar to the market leaders and, as a result, get exposed to common risks. This could amplify systemic risk through higher co-movement of performance of banks, even though individually they may focus on reducing their standalone bank risk through portfolio diversification.