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Informist, Thursday, Jan. 23, 2025

 

--Fitch: Recoveries, write-offs to offset rise in Indian bks' fresh bad loans 
--Fitch: Expect Indian banks' impaired-loan ratio to fall in FY25-FY26 
--Fitch: Growth in retail lending has increased medium-term risks 
--Fitch: Rising stress in unsecured retail risk to Indian bks' asset quality 
 

MUMBAI – The rising stress in unsecured retail loan portfolios could pose a risk to the asset quality of Indian banks, according to Fitch Ratings. The sector's impaired-loan ratio is likely to fall by 40 basis points to around 2.4% for the financial year ending March, with a further 20 bps improvement in FY26, despite new bad loans in 2024-25 and FY26 is expected to be around 25% higher than FY24, Fitch Ratings said.

 

"Rapid retail lending growth in recent years - in particular, for unsecured loans - has heightened medium-term risks. However, we still expect the sector's impaired-loan ratio to fall in FY25-FY26, driven by robust loan growth, as well as recoveries and write-offs, which are expected to offset the increase in fresh bad loans," the rating agency said.

 

The Reserve Bank of India expects the impaired-loan ratio to trough in FY25 before rising to around 3% in FY26 from the 2.6% reported in Apr-Sept.

 

"We believe the difference from our forecast partly reflects variance of opinions on the timing and extent of risk crystallisation, banks' exposure at risk, loan growth and India's economic performance," it said.

Unsecured personal loans and credit card borrowing grew at a compound annual growth rate of 22% and 25%, respectively, in the three years to FY24. The growth in unsecured personal loans and credit card borrowings has since moderated to 11% and 18% on year, respectively, in Apr-Sept, mainly due to the increase in risk weights introduced by the RBI in November 2023. 

 

The stress in unsecured retail loans has been rising and making up roughly 52% of new bad retail loans in Apr-Sept, it said. "The impact of defaults on unsecured loans could be amplified as approximately 50% of borrowers reportedly hold at least one other, often high-value secured retail loan, such as a housing or vehicle loan, which could also be affected in the event of default." 
 

Fitch Ratings also said that the lending stress appears to be concentrated in the unsecured personal loans of less than $600 (INR 51,903.5). Even though the exposure of the bigger Indian banks to such riskier loans is lower than the system, they are not completely insulated, given their high loan growth appetite and increased digital lending, it said.

 

Banks may also have indirect exposure through funding to non-banks and financial technology companies, which are more exposed to low-income borrowers. "Low-income borrowers, or those without income disclosure, constitute slightly over one-third of the system's outstanding consumer credit. Risks could spill over to the higher income categories in a market downturn, given the correlation between rapid unsecured personal loan growth and increased retail participation in financial markets since FY20. However, we think borrowers in these categories should exhibit greater resilience," the rating agency said.

The exposure of banks rated by Fitch Ratings to unsecured personal and credit card loans ranged between 2-15% of total loans, it said. "Accelerated write-offs by banks, particularly private banks that are more aggressive lenders to this segment, likely played a role in keeping the sector's unsecured retail bad-loan ratio muted at 1.7% in 1HFY24 (Apr-Sept), compared to the overall retail bad loan ratio of 1.2%, which includes lower-risk housing and vehicle loans," Fitch said. The risk appetite and ability to control and manage risks will continue to play an important role in the assessment of the viability ratings of the banks rated by Fitch, the rating agency said.  End

 

US$1 = INR 86.5100

 

Reported by Kshipra Petkar

Edited by Saji George Titus

 

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