MUMBAI: Indian banks in general may have reported strong earnings growth and a drop in gross bad loans, but the numbers hide the building stress in the unsecured credit portfolio of banks such as IndusInd Bank, Bandhan Bank and Yes Bank, among others.
The rise in bad loans that will come as a consequence of the rise in unsecured loans will be seen in the coming quarters. Lenders such as IndusInd Bank, Bandhan Bank and Yes Bank have reported a higher-than-expected rise in bad loans due to stress from the rising unsecured retail segment.
“Stress in unsecured retail loans, more so in the low-ticket and high-risk customer segment, is coming to the fore, justifying the RBI’s recent action towards increasing risk weights and containing run-away growth in such segments,” said a report by Emkay Global.
The central bank in November last year announced additional risk weights for unsecured loans to curb their expansion to ensure financial stability. However, banks have only seen an increase in these loans in the past few months, though the rate of growth has been slowing.
“Where the action is not being taken in a timely manner or if we do not see an effective action there in the public interest, in customer interest, in depositors’ interest and in overall financial system’s interest, it becomes necessary to take certain measures,” said Governor Shaktikanta Das at a press conference when asked about loan offers to all and sundry. “We take those measures because the Reserve Bank is the custodian of financial stability and financial systems.”
Unsecured loans reached 35% of bank portfolios in 2023, up from 25% in 2007, according to a recent research paper by the Reserve Bank of India.
But these loans when done with proper underwriting and the customer is chosen, can be more profitable to lenders than lending against a security which yields less.
“These loans are extremely profitable despite the risk they come with,” Srinivasan Vaidyanathan, CFO at HDFC Bank, said in an earnings call.
On the other hand, growth of deposits in Indian banks continues to lag behind credit growth. RBI data released in December 2023 shows an 11% deposit growth in 2022-23, compared to a 15% credit growth, pushing the gap of credit-to-deposit ratio to a 10-year high.
