Are Private Banks writing off Loans to hide Bad Assets?
The Reserve Bank of India (RBI)’s latest Financial Stability Report (FSR) has raised concerns over the increasing reliance on write-offs by private banks, which it says could obscure the true state of asset quality in the retail loan segment. While the overall asset quality of the banking system continues to improve, the report flagged potential risks, particularly in unsecured lending and underwriting standards.
Retail Loan Quality: A Mixed Picture
The report highlighted that the gross non-performing asset (GNPA) ratio for retail loans stood at a stable 1.2% as of September 2024. Additionally, early warning indicators of stress, such as special mention accounts (SMA) in categories 1 and 2, declined to 2.5% in September 2024 from 3.0% a year earlier. However, unsecured lending presented a slightly higher GNPA ratio of 1.7%.
Private banks were singled out for a sharp rise in write-offs, which the report suggested could be masking a deterioration in asset quality and a relaxation of underwriting standards. Notably, 51.9% of fresh NPAs in retail loans originated from unsecured loan portfolios.
Small Finance Banks Face Higher Stress
Small finance banks (SFBs) reported greater impairments in their retail lending portfolios. Their GNPA ratio was 2.7%, while the SMA (1+2) ratio stood at 3.6%. For unsecured lending, the GNPA ratio rose to 4.7%.
Liquidity Coverage and Deposit Trends
The banking system’s liquidity coverage ratio (LCR) declined to 128.5% in September 2024, down from 135.7% a year ago. Public sector banks (PSBs) saw a sharper drop, with their LCR falling to 127.4% from 142.1%, compared to a marginal decline for private banks, whose LCR stood at 126.1%.
Shifts in deposit patterns were also noted. The share of low-cost current account savings account (CASA) deposits fell, with term deposits—particularly those offering higher interest rates—accounting for 82% of incremental deposits in the first half of 2024-25. This trend reflects growing competition for savings and investor preference for higher returns.
Credit Growth and Asset Quality
Bank credit growth was led by services and personal loans, with credit card receivables showing robust growth. Housing loans were a standout contributor within personal loans. However, overall personal loan growth halved due to a high base effect and lower originations.
Industrial credit growth picked up but remained below the pace of other major sectors.
The GNPA ratio for scheduled commercial banks (SCBs) declined to a 12-year low of 2.6% in September 2024, while the net NPA ratio remained steady at 0.6%. Despite this improvement, the half-yearly slippage ratio rose slightly to 0.7%.
The report noted that write-offs continued to play a significant role in reducing NPAs. In retail loans, while asset quality was largely stable, credit card NPAs showed a marginal increase across bank groups. Given the rapid growth in credit card loans, the report called for close monitoring of this segment.
Conclusion
The RBI’s FSR underscores the need for vigilance in monitoring asset quality, especially in the retail and unsecured loan segments. While the banking system shows overall improvement, the reliance on write-offs and changes in deposit profiles highlight emerging challenges.
