Rating agency Fitch has said that the gross non-performing assets (NPAs) of Indian banks may decline by 40 basis points to 2.4% by March 2025. It may further drop by 20 basis points in the next financial year, it added.
Stress in retail loans is rising, particularly in unsecured credit, but robust growth, recoveries, and write-offs are expected to offset the increase in fresh bad loans, Fitch said in a statement.
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“We believe the difference from our forecast partly reflects variance of opinions on the timing and extent of risk crystallisation, banks’ exposure at risk, loan growth, and India’s economic performance,” said Fitch.
It said that currently, lending stress appears to be concentrated in unsecured personal loans of less than $600.
Large Indian banks’ exposure to such riskier loans may be proportionally lower than the system, but they are not completely insulated, given their high-loan growth appetite and increased digital lending, it added.
Unsecured personal loans and credit card borrowing grew at a compound annual growth rate of 22% and 25%, respectively, over the three years leading to FY24.
The pace slowed to 11% and 18% year-on-year (Y-o-Y), respectively, in the first half ended September 2024, following an increase in risk weights attached to unsecured lending.
The report highlighted that India’s household debt remains low compared to many emerging markets in the Asia Pacific – it’s at 42.9% of GDP as of June 2024 – but stress in unsecured retail loans is rising, making up roughly 52% of new bad retail loans in 1HFY25.
“Risks could spill over to the higher income categories in a market downturn, given the correlation between rapid unsecured personal loan growth and increased retail participation in financial markets since FY20. However, we think borrowers in these categories should exhibit greater resilience,” it said.
