Banks NPAs may dip to 2.4% by March despite stress in retail loans: Fitch

Robust growth, recoveries & write-offs to offset rise in slippages

The gross non-performing assets (NPAs) of Indian banks may decline by 40 basis points to 2.4 per cent by March 2025 and a further 20 basis points in the next financial year, said rating agency Fitch on Thursday.

 

Stress in retail loans is rising, particularly in unsecured credit, but robust growth, recoveries and write-offs are expected to offset the increase in fresh bad loans, it said in a statement.

 

The Reserve Bank of India (RBI) expects the impaired-loan ratio to trough in Financial Year 2024-25 (FY25) before rising to around 3 per cent in FY26, from the 2.6 per cent reported in the first half of FY25 (1HFY25). “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,” said Fitch.

   

Unsecured personal loans and credit card borrowing grew at a compound annual growth rate of 22 per cent and 25 per cent, respectively, in the three years to FY24. The pace slowed to 11 per cent and 18 per cent year-on-year (Y-o-Y), respectively, in the first half ended September 2024 (1HFY25), following an increase in risk weights attached to unsecured lending.

 

India’s household debt remains low compared to many emerging markets in Asia Pacific – it’s at 42.9 per cent of gross domestic product (GDP) as of June 2024 – but stress in unsecured retail loans is rising, making up roughly 52 per cent of new bad retail loans in 1HFY25. The impact of defaults in unsecured loans could be amplified as around 50 per cent of borrowers reportedly hold at least one and often high-value secured retail loan, such as for housing or vehicles, which could also be affected in the event of default.

 

Currently, lending stress appears to be concentrated in unsecured personal loans of less than $600 (little over Rs 51,000 on Thursday). Large Indian banks’ exposure to such riskier loans may be proportionally lower than the system’s, but they are not completely insulated, given their high-loan growth appetite and increased digital lending, said Fitch.

 

Banks may have indirect exposure through funding to non-banks and fintechs, which are more exposed to low-income borrowers. Such 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,” it said.