New Delhi, Jan 24: The gross non-performing assets (NPAs) ratio of Indian banks may decline by another 0.4 per cent to 2.4 per cent by March 2025 followed by a further 0.2 per cent dip in the next financial year, according to rating agency Fitch.
Key Points
1.
Banks expected to offset rising loan stress through robust growth
2.
Unsecured personal loans showing slower growth trajectory
3.
Household debt remains relatively low compared to regional markets
4.
RBI anticipates impaired-loan ratio changes in coming years
Although the stress in retail loans is rising, particularly in unsecured credit, robust growth, recoveries and write-offs are expected to offset the increase in non-performing loans, the Fitch report said.
It pointed out that currently, lending stress appears to be concentrated in smaller unsecured personal loans of less than $600 (over Rs 51,000). Besides, the exposure of large Indian banks to such riskier loans may be proportionally lower than that of the overall financial system.
Such risky loans are extended more by Non-Banking Financial Companies (NBFCs) and fintechs to low-income borrowers.
The RBI expects the impaired-loan ratio to trough in the 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," the Fitch report explained.
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 at 42.9 per cent of gross domestic product (GDP) as of June 2024 is low compared to many emerging markets in Asia Pacific. However, the stress in unsecured retail loans is rising, making up roughly 52 per cent of new bad retail loans in 1HFY25.
The report also mentioned that banks may have some 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 outstanding consumer credit in the financial system.
