Signs of slippage: Certain segments of borrowers require attention

An analysis of the first-quarter (April-June 2025) results of private-sector banks has shown that slippages have increased across the spectrum. It is also worth noting, as reported by some banks, that stress has emerged from unsecured loans and the agricultural sector. In the case of Axis Bank, for example, slippage increased by over 70 per cent sequentially to ₹8,200 crore.  However, at aggregate level, gross non-performing assets (GNPAs) increased marginally to 1.57 per cent, against 1.28 per cent in the previous quarter. In the case of Yes Bank, gross slippage increased to 2.4 per cent of advances, as against 2 per cent in the previous quarter. A clear picture will emerge once the results of all the banks, including public-sector banks, are out. These are still early reports, but the focus may be required on some segments of lending before it becomes a bigger problem. 

Unsecured lending by scheduled commercial banks (SCBs) steadily grew over the past several years and touched 25.5 per cent of the credit extended in March 2023. In response, the Reserve Bank of India (RBI) introduced stricter norms in November last year to restrict the flow. However, at systemic level, it is important to highlight that despite higher slippages reported by some banks, the overall health of the banking system remains good. As the latest Financial Stability Report (FSR) of the RBI showed, GNPAs for SCBs were 2.3 per cent in March 2025. This was a sharp improvement from a high of 9.6 per cent in March 2017.  Nevertheless, the early signs of stress should not be ignored. There could be reasons related to both demand and supply, which may have led to an increase in unsecured lending. This could also be an early sign of how the banking business in India may be changing. 

The Indian corporate sector has been in the process of deleveraging for several years. As the FSR showed, the debt-equity ratio for the non-financial corporate sector has been steadily declining since 2020-21. Given that the corporate sector is in no hurry to push investment in a big way for a variety of reasons, demand for loans from this segment may remain tepid in the foreseeable future. Further, with improved balance sheets, the corporate sector may find it more attractive to raise funds from the capital market. Last financial year, for example, fund mobilisation from the capital market went up by nearly 33 per cent, with the share of debt at 63.5 per cent. Thus, as the debt market deepens, it is likely that better-rated corporations will prefer raising funds from the capital market. Increased competition from the capital market could put pressure on the interest margins of the banking system. 

In terms of business, the shift by better-rated corporations to the capital market for funding needs might leave lower-rated companies, small businesses, and individual borrowers for the banking system to service. A shift in the lending base could increase costs in terms of assessing and monitoring borrowers and put pressure on margins. Although slippages are not alarming at this stage, it is worth investigating why they are increasing in certain segments. It has been reported that household debt in India, though lower than its peers, has been increasing. It can pose risks to both the banking system and economic growth. The RBI should also consider whether excess liquidity in the system could worsen the situation.