Analysts say major Indian banks are facing increased risk from bad loans and have set higher provisions amid rising defaults in personal loans and micro-credit segments
Major Indian banks, including HDFC Bank, IndusInd Bank and Kotak Mahindra, are facing increased defaults from over-leveraged small borrowers. Reuters report said that a rise in stress levels within personal loans and micro-credit segments is expected. This trend signifies a shift in the credit cycle, with bad loans increasing after previously reaching a multi-year low of 2.8 per cent of total assets as of March 2024, the news agency reported citing Reserve Bank of India (RBI) data.
As of September, five of the eight largest private-sector banks reported an increase in bad loans. HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, RBL Bank, and IDFC First Bank saw the percentage of bad loans rise between 2 and 19 basis points during the quarter.
Many banks also increased their provisions for these loans. This means they set aside money to cover potential defaults as they expect more loans to fail.
Bad Loans: Key Details
Personal loans and credit cards have experienced significant growth exceeding 25 per cent earlier this year, prompting the Reserve Bank of India (RBI) to intervene to manage rising retail lending. Analysts predict that loan slippages, or the rate at which good loans deteriorate, may remain elevated for the next 3-4 quarters amid increasing defaults and stricter capital requirements on banks. However, they add that well-capitalized banks may not face immediate concerns, and the ongoing trend of bad loans could impact overall profitability.
RBI governor had also raised a similar concern in the MPC meeting asking Banks and NBFCs, to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust, he said. The segments are unsecured loan segments like loans for consumption purposes, microfinance loans and credit cards outstanding.
Additionally, defaults in the microfinance sector have increased, largely due to climate disruptions affecting rural incomes, leading the RBI to ban several non-banking lenders for predatory lending practices. The Reserve Bank of India had banned four non-banking lenders icluding Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv from fresh lending recently.