The rising stress levels in unsecured retail loan portfolios could significantly impact asset quality, with non-performing assets (NPAs) projected to increase by 25% over FY24 levels in FY25 and FY26, according to a report by Fitch Ratings.
International agency Fitch has highlighted that private sector banks, including HDFC Bank and Kotak Mahindra Bank, reported substantial growth in their retail, agriculture, and microfinance institution (MFI) portfolios during Q3, as per The New Indian Express.
"We forecast the banks’ impaired-loan ratio to fall by 40 bps to around 2.4 per cent for the current financial year and by another 20 bps next fiscal, despite expecting new bad loans in FY25 and FY26 to be around 25 per cent higher than in FY24," Fitch stated in its report on January 23.
The report also cautioned that the rapid growth in retail lending, particularly in unsecured segments, over recent years has increased medium-term risks.
Unsecured personal loans and credit card borrowings had grown at an annual rate of 22% and 25%, respectively, over the three years leading up to FY24.
However, this growth slowed to 11% and 18%, respectively, during the first half of FY25 following the Reserve Bank of India's (RBI) decision to increase risk weights on unsecured lending by 25 percentage points in November 2023.
Fitch warned that while the current fiscal may see a reduction in the impaired-loan ratio, the aggressive expansion in unsecured lending over recent years could exacerbate asset quality pressures in the medium term.
International agency Fitch has highlighted that private sector banks, including HDFC Bank and Kotak Mahindra Bank, reported substantial growth in their retail, agriculture, and microfinance institution (MFI) portfolios during Q3, as per The New Indian Express.
"We forecast the banks’ impaired-loan ratio to fall by 40 bps to around 2.4 per cent for the current financial year and by another 20 bps next fiscal, despite expecting new bad loans in FY25 and FY26 to be around 25 per cent higher than in FY24," Fitch stated in its report on January 23.
The report also cautioned that the rapid growth in retail lending, particularly in unsecured segments, over recent years has increased medium-term risks.
Unsecured personal loans and credit card borrowings had grown at an annual rate of 22% and 25%, respectively, over the three years leading up to FY24.
However, this growth slowed to 11% and 18%, respectively, during the first half of FY25 following the Reserve Bank of India's (RBI) decision to increase risk weights on unsecured lending by 25 percentage points in November 2023.
Fitch warned that while the current fiscal may see a reduction in the impaired-loan ratio, the aggressive expansion in unsecured lending over recent years could exacerbate asset quality pressures in the medium term.
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