Indian lenders face rising defaults from over-leveraged retail borrowers

IDFC First Bank

29/10/2024 07:37

By Siddhi Nayak and Jaspreet Kalra
       MUMBAI, Oct 29 (Reuters) - A rise in defaults by
over-leveraged small borrowers is hitting India's top lenders,
with bank executives and analysts expecting higher levels of
stress in the personal loans and micro-credit segments over the
next year.
    The rise in defaults marks a turn in the credit cycle for
Indian lenders, whose bad loans dropped to a multi-year low of
2.8% of all assets as of end-March, according to central bank
data.
    In the September quarter, however, five of the eight largest
private sector banks have reported an increase in bad loans.
        HDFC Bank  HDBK.NS , Kotak Mahindra Bank  KTKM.NS ,
IndusInd Bank  INBK.NS , RBL Bank  RATB.NS  and IDFC First Bank
 IDFB.NS  saw gross bad loans as a percentage of total assets
rise between 2 basis points and 19 basis points during the
quarter.
    Most banks have also increased provisions, or funds set
aside to cover bad loans, in anticipation of a rise in defaults.
    The surge in retail loan defaults comes against the backdrop
of a booming economy, which is seen expanding 7.2% in the
current year to March 2025 with bank lending growing at twice
that pace.
    Segments such as personal loans and credit cards, in
particular, saw much faster growth, in excess of 25% until
earlier this year, forcing the central bank to step in to curb
"exuberance" in retail lending.
    Slippages, or the proportion of good loans turning bad,
would be elevated and stress could remain high "for the next 3-4
quarters at least", said Pranav Gundlapalle, senior research
analyst at Bernstein.
        Rising defaults, along with higher capital requirements
imposed on banks last year, and series of actions against
exuberant lending practices have slowed growth in segments such
as personal loans and credit cards.
    While a moderate worsening of asset quality may not be an
immediate cause of concern for well-capitalised banks, the trend
of rising bad loans and slowing retail loan growth could weigh
on their profitability outlook, analysts said.
    "We do see a general trend, particularly in unsecured
(loans), where there is stress across multiple segments," said
Arjun Chowdhry, group executive for segments including cards and
retail loans at Axis Bank  AXBK.NS , the country's third-largest
private lender.
    Stress is being driven by "indebtedness" caused by
over-leveraging, Chowdhry said on an analyst call.
    
    
    RISING DEFAULTS 
    The surge in bad loans is being seen mainly among borrowers
who have three or more unsecured personal loans, said Rajeev
Jain, managing director of Bajaj Finance, India's largest retail
non-bank lender, due to easy access to funding amid extensive
competition to gain market share.
    For example, Harpal Singh, a 45-year old Mumbai resident
whose annual income is 780,000 Indian rupees ($9,278), racked up
personal loans and credit card debt of five million rupees over
the last six years and is now struggling with the repayments.
    "Medical emergencies have completely wiped off my savings
and the general cost of living in Mumbai is so high that there
is hardly anything left to pay," Singh said.
    
    
    Defaults have also risen in the microfinance segment, which
includes loans given to low-income borrowers.
    Climate-related disruptions to crops have eroded incomes in
rural areas, said a banker with a state-run bank, declining to
be identified as they are not allowed to speak to the media.
    The central bank, which this month barred four non-bank
lenders from fresh lending due to "usurious" pricing practices,
has sought data from microfinance firms on loan spreads, said
five sources familiar with the requests.
    The sources declined to be identified as they are not
authorised to speak to the media. An e-mail sent to the central
bank was not answered.
($1 = 84.0740 Indian rupees)

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Indian lenders have seen an increase in defaults    https://reut.rs/48mI76i
Growth in unsecured retail loans has outpaced bank credit    https://reut.rs/4e2EfZA
BREAKING VIEWS: India's microfinance trouble goes mainstream   
 urn:newsml:reuters.com:*:nL4N3M40FR
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 (Reporting by Siddhi Nayak and Jaspreet Kalra; Editing by Ira
Dugal and XXX)