In the last 2-3 years, banks in India saw strong double-digit growth in credit, well ahead of deposit growth. One big driver of that growth was a surge in retail lending.
Areas like unsecured personal loans and credit cards saw strong traction, so much so that the Reserve Bank of India had to step in and tighten lending norms for retail loans back in November 2023. While that has had its desired effect, with credit growth slowing and aligning more closely to the deposit growth rate in recent quarters, the central bank still sees potential risks.
On the face of it, banks' asset quality, even in the retail lending segment, has been good. According to RBI's latest Financial Stability Report (FSR), the gross NPA (non-performing assets) ratio in retail loans stood at 1.2 per cent as of September 2024; it was slightly higher at 1.7 per cent for unsecured lending. While things may seem fine, higher write-offs may perhaps hide the real picture, something the central bank is concerned about.
"An area of concern is the sharp rise in write-offs, especially among private sector banks, which could be partly masking worsening asset quality in this segment and dilution in underwriting standards," it said.
Small finance banks (SFBs) are seeing larger impairment in their retail lending portfolio, with a GNPA at 2.7 per cent and unsecured loans at a higher GNPA of 4.7 per cent.
Credit card receivables, too, have seen a marginal uptick across bank groups, which recorded the highest credit growth within the personal loans segment, and may require careful monitoring, the RBI noted.
According to credit ratings agency ICRA, the gross fresh NPA generation for all banks is expected to marginally rise to 1.6 per cent in the current financial year ending March 2025, from 1.5 per cent in 2023-24.
"With the retail sector facing increasing stress, the overall fresh slippages are expected to rise, and recoveries/ upgrades are likely to gradually taper," it said on Thursday.
Importantly, the FSR has flagged a rise in household debt to GDP. India's household debt to GDP was at 42.9 per cent as of June 2024, which while relatively low compared with other emerging market economies, has gone up in the past three years, the RBI noted.
"India is in the midst of a cyclical slowdown, and this evidence of household balance sheet stress chimes with weak income and K-shaped urban consumption demand," pointed out Nomura economist Aurodeep Nandi.
According to his analysis, subprime borrowers are primarily taking on consumption loans, while those better-off are taking on leverage to buy assets, which suggests a K-shaped credit market.
While the asset quality issues in the retail lending segment will have to be watched out for in the coming quarters, overall credit growth in this segment has come off sharply following RBI's steps to tighten risk management and underwriting standards and banks, in turn, reducing their exposure to unsecured retail and non-bank finance companies. Unsecured retail lending growth, for instance, declined to 15.6 per cent in September 2024, from 27 per cent in September 2021.
ICRA estimates overall credit growth to be around 10.5-11.0 per cent in the current financial year ending March 2025, slower than its earlier expectation of 11.6-12.5 per cent.
