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Economic Slowdown Could Lead To Rise In Retail Loan Defaults, Says India Ratings

Slowing economic growth over the past year could lead to a rise in defaults and slippages in retail loans, India Ratings said.

A couple speaks to an HDFC Bank Ltd. loan officer about a home loan at a branch in eastern Mumbai, India. (Photographer: Santosh Verma/Bloomberg News)
A couple speaks to an HDFC Bank Ltd. loan officer about a home loan at a branch in eastern Mumbai, India. (Photographer: Santosh Verma/Bloomberg News)

India’s slowing economic growth over the past year could lead to a rise in defaults and slippages in the retail loan portfolio of banks.

That’s according to India Ratings and Research, which said in its bank credit outlook for 2020-21, that the slowdown has led to slippages in loans to agriculture, retail and micro-small-medium enterprise segments.

“There has been an increase in gross non-performing assets across the retail loans segments between FY15 and FY19, but the biggest impact (this fiscal) has been in education loans,” said Karan Gupta, associate director, India Ratings and Research, told reporters today.

The portfolio of unsecured retail loans—including personal loans and credit cards—as a proportion of total loans among banks has risen from 28 percent in March 2016 to 35.3 percent in November 2019, Gupta said.

That comes as slowing consumption dragged India’s economic growth to the lowest in six years as people cut back on the purchases of items ranging from hair oil and soaps to cars. That led the Reserve Bank of India to cut India’s GDP growth forecast for 2019-20 to 5 percent from 6.1 percent.

Economic Slowdown Could Lead To Rise In Retail Loan Defaults, Says   India Ratings

If inflation continues to rise and economic growth doesn’t pick up there will be further upticks in the gross non-performing assets and credit costs for banks, the report said. Some banks, it said, have already front-loaded provisions against accounts in the retail segment as a precautionary measure.

“Over the last three to four years the retail loan book has grown at over 15 percent, but wage growth and employment growth has been at a lag,” Gupta said, adding that retail loan growth could fall if the slowdown persists.

India Ratings and Research

Stressed Corporate Assets Decline

The proportion of stressed corporate assets in the banking system declined to 17.9 percent (of total bank credit) as of September 2019 from 19.3 percent a year ago on the back of write-offs, improved credit profiles of accounts and overall credit growth, the rating agency said.

“While Ind-Ra believes the majority of stressed corporates have undergone rapid credit migration in the last few years, the aversion of bankers to take on additional risk could result in more slippages than estimated,” it said.

Around Rs 17.4 lakh crore worth of corporate loans were stressed as of September 2019, of which 2.7 percent belongs to public-sector undertakings and 2.9 percent to large corporate groups, the report said.

Around 3.9 percent of stressed corporate accounts have a high probability of slippage in the coming year, India Ratings said.

Nearly a third of the stressed assets that could most likely slip into default next year were power companies, the report said, followed by other industries—healthcare, IT, agri-products and pharma firms—comprise 20.2 percent, India Ratings said.

“The NPAs in the power sector for banks stand at around Rs 1.7 lakh crore, of which the banks have provided Rs 1.1 lakh crore against these accounts,” Gupta and Ruhi Pabari, analyst at the ratings agency, said. “We don’t expect any big bang resolutions as the timelines keep getting extended due to procedural and judicial delays.”

The overall provision coverage for the banking system rose to 63.5 percent as of September 2019 from 53.6 percent a year ago.

While the risk of additional slippages and ageing NPAs add to the banks’ credit costs, India Ratings said both private and state-run lenders have adequate capital to absorb the costs. That comes on the back of additional capital infusion of Rs 70,000 crore by the government into state-run lenders this year.

That apart, India Ratings also expects credit costs for banks to moderate to below 3 percent in the next 18 months.