Credit costs for unsecured loans could make up between 60% to 70% of the total provisions for large private sector banks in fiscal 2025 after a strong 26% growth in this segment the last five years, Nomura Securities said in a report.
However, the Japanese brokerage does not expect bank earnings to deteriorate due to risks emerging from their unsecured portfolio due to the large contingency provision buffers that these banks carry. Nomura analysts Parameswaran Subramanian, Ankit Bihani and Ajit Kumar, assumed 250 to 300 basis points of credit cost in personal loans and about 600 basis points for credit cards. One basis point is 0.01 percentage point.
Credit costs is the amount of provisions banks have to take to make up for loan losses. It is expressed as a percentage of the loan book. The Nomura analysts measured credit costs for banks like Bandhan for which unsecured loans make up 52% of the loan book and also banks like HDFC, ICICI, Axis, IndusInd and Kotak for whom unsecured loans are between 10% to 20% of their loan book.
For Bandhan which has a large micro finance book, credit costs from unsecured loans could make up to 157 basis points or 75% out of the total credit cost of 209 basis points while for Kotak Mahindra it could make 39 basis points or 67% out of the total credit cost of 58 basis points.
Though unsecured loans make 20% of IndusInd’s total loan book, credit costs from this segment could make up 44% of total credit costs as provisions from other segments are expected to be higher by fiscal 2025.
For larger private sector banks like HDFC, ICICI and Axis credit costs from this segment could range between 59% to 64%, Nomura estimates. “While most lead indicators do not flag imminent risk for banks, the regulator’s repeated warnings on unabated growth in the segment, as well as concerns on rising consumer leverage have sparked investor concerns,” the analysts said.
Unsecured loans contribute about 6% of overall system (incl. NBFCs), and contribute 11% for the banking system up from 8% in fiscal 2019. “While unsecured retail is a legacy segment for most banks (which continue to largely fund internal customers, for most NBFCs this is largely a new segment that has been scaled up post pandemic. Bureau data show that NBFCs have gained significant disbursement market share in this segment over the past 2 years,” Nomura said.
The brokerage will watch for lead indicators in the form of regulatory signals from RBI, system bounce rates, revolve rates on credit cards, deterioration in asset quality for NBFCs (which largely lend to a slightly weaker economic segment), and any sharp moderation of growth rates in these segments in the near future to assess risks from this segment.
Nomura notes that though the RBI has given warnings on unsecured lending to banks and NBFCs, it has not taken any direct regulatory action as yet. “We are yet to see any material deterioration in system bounce rate and revolve rates on credit cards, while we have started to see some marginal deterioration in asset quality of NBFCs in the first quarter,” the brokerage said.
