A deep dive into the granular data on asset quality trends in RBI’s Financial Stability Report (FSR) – June 2023 provides greater clue for business transformation in banks. Going beyond the fact that the Gross Non-Performing Assets (GNPA) declined to a 10-year low of 3.9 per cent in March 2023, banks need to take a cue from further analysis of data. An indication of stress is evident in low-ticket retail loans, unsecured and credit card receivables.

FSR observed that close to 10 percent of retail borrowers are missing monthly loan repayment commitments while managing to stay standard by using the 90-day window to pay minimum dues to avert classification into NPAs. If loan repayment due in 30 days is paid during the extended period of 90 days is not a good sign. Though the GNPAs of retail loans are at 1.4 per cent in March 2023, its data of special mention accounts (SMA) is relatively high at 7.4 per cent.

Rising inflation and policy rates are likely to put stress on EMIs of borrowers.

Going forward, the asset quality may come under stress in coming years with a corresponding impact on the capital adequacy ratio (CAR) of banks.

Sectoral shift

During the period March 2018 to March 2023, the CAGR of agriculture credit is 12.82 per cent, Industry – 5.24 per cent, Services sector – 16.20 per cent, and Personal loans growth stands at 16.80 per cent. Obviously, banks have built up credit risk in the service sector and retail which may devolve at a later point in time.

FSR data suggests that risks in retail, more importantly, the low-ticket loans linked to monthly repayments may face higher credit risk evident from stress tests.

Banks’ personal loan portfolio increased from ₹27.27 trillion in March 2020 to ₹40.85 trillion by March 2023. Banks may have to introspect if the growth is planned in sync with the risk appetite and ability to monitor low-ticket loans.

To diffuse credit risks, banks had kept the exposure to large borrowers (₹5 crores and above) at close to 48 per cent in March 2021, which came down marginally 47.3 per cent by September 2022. Credit risk is reined by consciously containing exposure to large credit.

At the same time, banks focused on large loan accounts to bring their share in the stock of GNPAs down from 75.6 per cent of the pool to 62.2 per cent during the period. It resulted in the GNPAs of large borrowers going down from 10 per cent in March 2021 to 6.4 per cent in September 2022. Even the asset quality of the top 100 borrowers also improved considerably, as their share in GNPA declined from 6.8 per cent in March 2022 to 5.4 per cent in September 2022.

Thus, the credit risk of large borrowers is well mitigated by controlling exposure and better follow-up and recovery of existing exposure.

Loan load

The sectoral risk also has a link with the load of loan accounts. According to the RBI data, the number of loan accounts in March 2023 stands at 33.16 crore. Out of them, 94.27 per cent – 31.25 crore are loan accounts of less than a ₹1 million. 5.40 per cent of loan accounts are in the range of ₹1 million to ₹10 million. Loan accounts of over ₹10 million hardly work out to 0.33 per cent – 10 lakh accounts.

Logically, to make commercial sense, banks will focus on loan accounts of ₹10 million and above as the size of the loan account does matter in performance measurement metrics.

Banks often consider that retail loans carry low risk as they are widely held but their high cost of follow-up and low-ticket size increases their vulnerability adding to the credit risk. Most of the retail loans including unsecured loans and credit cards are of less than ₹10 lakhs. Retail loan accounts escaping banks’ scrutiny will soon turn toxic.

Going ahead, Banks should not only look at sectoral credit risk but must compute the load of the number of loan accounts and their capacity and profit-worthiness to manage them.

The writer is Adjunct Professor, Institute of Insurance and Risk Management – IIRM. Views experssed are personal

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