For the past year, Reserve Bank of India has been sending out signals that it dislikes the goings-on in the retail lending space. In November 2023, it asked banks and NBFCs to put aside more capital for unsecured retail loans. It also hiked capital requirements for banks’ lending to NBFCs that were into such segments. In the subsequent months, it cracked the whip on some microfinance, gold and digital lenders for doubtful lending practices.

All this has made markets worry if Indian lenders are teetering on the brink of yet another bad loan crisis in retail loans, which will snowball in the coming months.

But how serious is the bad loan issue in retail loans? Can it blow up like the corporate loan crisis of 2018 and de-stabilise banks and NBFCs? A dispassionate analysis of data from RBI’s Financial Stability Report (FSR) and Trend and Progress of Banking, both released last week, suggests that such fears are over-blown.

Bank and NBFC exposure to unsecured retail loans is not very large. Non-performing assets (NPAs) in these loans are below 3 per cent at the aggregate level, compared to the 9 per cent plus NPAs on corporate loans during the 2018 crisis.

Households not over-leveraged

Are Indian households living on the edge like American consumers before the sub-prime crisis or Chinese consumers more recently? Not really.

India’s household debt-to-GDP ratio was at 42.9 per cent in Q2 2024, compared to over 70 per cent for the US and 63 per cent for China. India’s household debt has risen in the past two years.

But RBI’s FSR notes that this increase is driven by more people taking loans, rather than existing borrowers taking on more debt. Super-prime borrowers have seen the most increase in debt. These borrowers take loans mainly for asset creation — buying homes and vehicles. Sub-prime borrowers take more loans for consumption. But lenders have reduced approval rates for both sub-prime and lower-income borrowers in the last two years.

Unsecured loans aren’t big

For an unsecured retail loan crisis to destabilise the banking or financial system, banks and NBFCs need to have sizeable exposure to such loans. But calculations show that their exposure is just 11-12 per cent.

Retail loans accounted for 33.3 per cent of the ₹171 lakh crore advances of commercial banks in September 2024. After excluding loans backed by assets such as homes, vehicles, gold and investments, about 33 per cent of retail loans were unsecured. Unsecured loans thus made up 11 per cent of total bank credit.

What of NBFCs, which usually engage in riskier lending? As per RBI’s Trends and Progress of Banking report, of the ₹43 lakh crore outstanding loans of NBFCs in September 2024, 35 per cent were retail. Of these, an estimated 35 per cent were unsecured. Thus about 12 per cent of total NBFC advances may be unsecured.

Thus, even if banks or NBFCs were to see a tenth of their unsecured loans turn bad, this would impact their books only by 1.1-1.2 per cent.

NPAs not high

During the corporate bad loan crisis of 2013-2018, Indian lenders grappled with gross NPA ratios of 9-10 per cent. Bad loans in lenders’ retail books today are at 2-3 per cent levels.

In September 2024, banks reported gross NPAs of 1.2 per cent on their retail loans and 1.7 per cent on their unsecured loans. In addition, there were 2 per cent of loans that were overdue but had not yet turned into NPAs.

The aggregate NPA picture for NBFCs was not alarming either. Gross NPAs for middle and upper layer NBFCs (making up much of the sector) were at 3.5 per cent and 3.4 per cent, respectively. Housing, durable, credit card, gold, microfinance and other retail loans for NBFCs reported 2-3 per cent GNPAs. Vehicle loans are the only outliers at nearly 5 per cent.

These bad loans seem quite manageable, with lenders already providing for over two-thirds of them. Writing off bad loans can be a problem if banks or NBFCs are at risk of running out of capital. But in September 2024, banks were sitting on capital adequacy of 16 per cent against the regulatory norm of 11.5 per cent and NBFCs were at 26 per cent against the norm of 15 per cent.

Growing too fast?

Retail loans were an over-speeding segment for banks and NBFCs, but RBI actions in the past year have acted as a speed-breaker.

Retail loan growth for banks has slowed from 27 per cent in September 2021-September 2023, to 13 per cent in September 2023-September 2024. Bank unsecured retail loans slowed from 27 per cent to 16 per cent in this period.

NBFC retail loans did not slow as much as bank loans and were still growing at 26.7 per cent in September 2024. But microfinance lending has decelerated to 10 per cent growth in September 2024 from over 40 per cent a year before. Credit cards and “other retail loans” for NBFCs continued to race along.

Pockets of trouble

Having said this, the granular data in the FSR does spotlight retail pockets that look like they’re heading for trouble. Small finance banks have elevated NPAs, with GNPA ratios at 2.7 per cent and another 3.6 per cent in stressed loans.

For mainstream banks, credit card and education loans are pockets of elevated NPAs. Credit card receivables are a bugbear for public sector banks with GNPAs of 12.7 per cent in September 2024. They, however, made up only 0.2 per cent of the PSB book. Private banks seem to have their credit card NPAs under control at 2.1 per cent. Save these segments, there is no loan category for banks where NPAs exceeded 2 per cent in September. For NBFCs, vehicle loans are a problem area, making up a third of their retail exposure and featuring nearly 5 per cent GNPAs in September 2024.

Across both banks and NBFCs, microfinance loans are a source of stress. The FSR noted that the proportion of microfinance loans that were overdue for over 30 days spiked sharply from 2.15 per cent to 4.3 per cent in just the six months from March 2024 to September 2024.

The RBI seems to be worried about borrowers taking on multiple loans, which can lead to defaults in one segments spilling over to another. In this context, the FSR found 11 per cent of the folks who took personal loans less than ₹50,000 already had an overdue personal loan. The percentage of borrowers availing loans from four or more lenders rose from 3.6 per cent to 5.8 per cent over three years to September 2024.

Overall, small finance banks and NBFCs with a focus on microfinance, vehicle loans and unsecured personal loans are the ones where delinquencies can escalate. These should be the entities that risk-averse depositors, stock and bond investors treat with caution.

Published on January 6, 2025