Rising stress levels in unsecured retail loan books could pose significant risks to asset quality, with non-performing assets (NPAs) projected to increase by 25% over the previous fiscal’s levels in the financial years 2025 and 2026, warns Fitch Ratings.
The international rating agency highlighted concerns regarding the rapid growth in retail, agriculture, and microfinance institution (MFI) lending by private sector banks, including HDFC Bank and Kotak Mahindra Bank, as reported in their Q3 earnings.
“We forecast the banks’ impaired-loan ratio to decline by 40 basis points (bps) to approximately 2.4% for the current financial year and by an additional 20 bps in the next fiscal. However, we expect new bad loans in FY25 and FY26 to rise by about 25% compared to FY24 levels,” Fitch Ratings stated in a report released on Thursday.
Medium-Term Risks on the Rise
The report pointed out that the rapid expansion of retail lending in recent years has increased medium-term risks. Unsecured personal loans and credit card borrowings, which grew at an annual rate of 22% and 25%, respectively, in the three years leading up to FY24, have shown a slowdown in the first half of the current fiscal, with growth rates of 11% and 18%, respectively.
Impact of Regulatory Measures
The slowdown comes in the wake of the Reserve Bank of India (RBI) increasing the risk weights attached to unsecured lending by 25 percentage points in November 2023. This regulatory measure was aimed at curbing excessive risk-taking in the unsecured lending segment.
Implications for Banks
Fitch emphasized that while the impaired-loan ratio is expected to improve in the near term, the growing stress in unsecured retail loans could challenge the sustainability of this trend. The agency warned that the aggressive lending strategies adopted by private sector banks could exacerbate asset quality concerns in the medium term.
With unsecured lending remaining a key focus area for many banks, the coming years are expected to test their ability to manage risks effectively and maintain robust financial health.
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