India’s banks are half-ready for a credit crunch

RBL Bank

23/01/2025 04:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Shritama Bose
       MUMBAI, Jan 23 (Reuters Breakingviews) - A small-loan
crisis is creeping up on India’s banks. Bad debt inched up at
the $146 billion HDFC Bank  HDBK.NS  and other private lenders
in the three months to the end of December, and the central bank
recently warned of a deep rot in small loans. The $2 trillion
banking system is better prepared for an asset quality crisis
than a decade ago, but a stalling economy could batter its
defences.
    HDFC’s gross bad loan ratio rose six basis points from the
end of September to 1.42%. Axis Bank  AXBK.NS  doubled its
provisions and contingencies from the same three-month period in
the previous year to account for defaults on unsecured personal
loans, and Kotak Mahindra Bank  KTKM.NS  raised them by 37%. 
    India’s banks learnt some lessons from the last blowup in
2015-16, when a string of chunky project loans left their
balance sheets bleeding. At 16.7%, their capital as a share of
risk weighted assets is nearly four percentage points higher
than in 2014. The share of the top 100 borrowers in outstanding
loans is down to 15% from 18%. Bad loans are at a 12-year low of
2.6%. And the Reserve Bank of India mandates Indian lenders hold
a 2.5% buffer above the 9% minimum capital requirement under
Basel III norms. It tightened the screws on unsecured loans in
November 2023 to curb excessive risk-taking.
    Macroeconomic disruption could mess with that. An RBI stress
test revealed  that in an extreme scenario where GDP growth
slows to around 3% and inflation rises to 7.8%, four banks may
breach the minimum capital requirement of 9%. 
    Mid-sized private banks are prone to that risk. In 2020, Yes
Bank’s  YESB.NS  rivals rescued it from near-failure with cash
infusions and months later, Singapore's DBS  DBSM.SI  acquired
another capital-starved lender based in southern India. That’s
making markets jittery about private lenders like RBL  RATB.NS 
and IndusInd Bank  INBK.NS  which specialise in microloans of
under $500, the segment where the stress is deepest. The finance
chief of IndusInd, which reported surging provisions and a
profit drop in the September quarter, resigned on Friday.
    So far the risk is limited to only a slice of loans --
unsecured loans account for a quarter of total bank credit. To
contain it, banks are easing off on new lending. That in turn
could slow GDP growth further. It’s a feedback loop India can
ill afford.
    Follow @ShritamaBose on X

    CONTEXT NEWS
    HDFC Bank on Jan. 22 reported consolidated net profit of
$2.04 billion for the three months to Dec. 31, 2% higher than in
the same period a year earlier. The bank’s gross non-performing
asset ratio rose six basis points from the end of September to
1.42%.
    IndusInd Bank on Jan. 18 said Chief Financial Officer Gobind
Jain resigned from the position on the previous day to pursue
other professional opportunities.

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Graphic: Indian banks have grown their capital base    https://reut.rs/4gbiRT1
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 (Editing by Antony Currie and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  BOSE/ 
shritama.bose@thomsonreuters.com))