Private lenders see increased retail stress in April-December

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MUMBAI : The aggressive push for credit cards and high-margin personal loans has come back to haunt private banks, increasing stress on their retail portfolios as borrowers grapple with pay cuts and job losses fail to repay not their loans on time.

Private banks appear to be hit harder than most state-run peers when it comes to stress in retail lending portfolios, data presented to parliament showed. Distressed loans include bad debts and restructured loans.

Most banks do not offer a breakdown of their stressed loan portfolio between retail and corporate segments. The data, from the Reserve Bank of India (RBI), provides insight into the stress levels of retail borrowers in the banking system between March and December 2020. Analysts have in the past pointed to potential stress among borrowers individuals as a fallout from the income disruption caused by the covid-19 pandemic.

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Debt burden

While public lenders like Punjab National Bank, Union Bank of India and UCO Bank have seen a drop in retail stress, private lenders like HDFC Bank, IDFC First Bank, IDBI Bank and Kotak Mahindra Bank have seen exactly opposite. Of the nine banks that experienced increased retail stress, seven were in the private sector and only two were public, according to Parliament data.

Private banks have a higher share of unsecured loans, or loans that are disbursed without any collateral on their books compared to their government-owned peers – one possible reason for their higher retail stress. Unsecured loans offer higher returns although they carry greater risk. In fact, all banks are gradually changing their strategy on unsecured loans, demonstrating the vulnerability of these loans to adverse events and external shocks.

Unsecured loans include credit cards, personal loans, student loans, and microfinance. Non-performing assets (NPA) on education loans increased to 9.55% in December 2020 from 7.61% in March.

Unsecured loans represent 15.6% of the overall loan portfolio of private banks, compared to 6.3% among their state counterparts, according to data from India Ratings and Research. Excluding the country’s largest lender, the State Bank of India, the share of unsecured loans for public sector banks is even lower, at 4.9%.

India Ratings and Research said on March 16 that the performance of unsecured asset classes, such as microfinance loans, unsecured commercial loans and consumer loans, was deteriorating, given the exhaustion of the cushions. borrowers’ financial statements and the nature of those loans.

“The moratorium has delayed stress in those segments where delinquencies have not yet stabilized, and higher loan losses are expected to materialize in FY 22,” he said.

Granted, some private banks like Axis Bank, ICICI Bank, Yes Bank and Federal Bank experienced a drop in stressed retail advances between March and December. The bank with the biggest increase is Punjab and Sind Bank at 380 basis points (bps), and the one with the biggest decrease is UCO Bank, based in Calcutta, at 250 bps, according to data presented to parliament.

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