Personal loan NPAs to be 5-8% in 2010: Fitch

Although non-performing asset (NPA) levels in asset-backed loans seem to be stabilising, NPAs in personal loans are likely to increase to 5-8 per cent, according to ratings agency Fitch.

For small-ticket personal loans, the outlook is worse, with delinquencies expected to reach 12-15 per cent by the end of the year, according to the agency.

During boom years, private sector and foreign banks had gravitated towards unsecured loans, where interest rates can be as high as 18 per cent. However, this segment was the first casualty of the downturn as these loans are not backed by collateral. Certain players such as CitiFinancial, GE Money and ICICI Bank were hit so hard that they are not expected to return to the segment again anytime soon.

Although disaggregated data on personal loans are not available, banks have moved fast to cut their exposure to this segment. ICICI Bank, which used to be one of the largest players in this segment, has nearly halved its personal loan book from Rs 11,025 crore to Rs 5,649 crore over the past 15 months.

The cut-back has extended to other personal loan categories as well. Between April 2008 and November 2009, about 7.5 million credit cards, or a quarter of the country’s peak card base, were taken out of circulation. Banks’ outstanding loans for consumer durables have fallen 17 per cent to Rs 8,028 crore between February 2008 and November 2009.

Fitch said recoveries from defaults on personal loans were expected to be in the range of 10-18 per cent. This figure is expected to be 5-10 per cent for small-ticket personal loans. Accordingly, the agency has assigned a negative outlook to personal loans.

In commercial vehicle loans, Fitch expects stable performance 2010 on the back of improved industrial activity and a gradual economic recovery. However, inflation is a major concern in this category. “Given that the underlying obligors have limited disposable income, they are particularly vulnerable to rise in food prices,” said the ratings agency.

Construction equipment loans are likely to be stable as demand for these assets is depends on the state of infrastructure. The government’s focus on building infrastructure is expected to improve the order books of small-scale construction companies.

“Despite this, increased competition in the construction space may put pressure on operating margins. We expect temporary cash flow shortfalls in CE pools on account of delays in project execution and, in some cases, delays in payment,” said the report.