Banks’ retail stress may rise in FY22 driven by unsecured loans: Ind-Ra

So, therefore, the expectation is that qualitatively they would be somewhat better than private sector banks,” Haria said.

The level of stress – bad loans and restructured assets – could rise 1.7 times for the banking system in FY22, with private banks seeing a greater increase in stressed loans than public sector banks (PSBs), India Ratings and Research said on Monday.

The agency has revised its outlook on the overall banking sector to stable for FY22 from negative because substantial systemic measures have reduced the system-wide Covid-linked stress below the expected levels. Banks have also strengthened their financials by raising capital and building provision buffers.

Jindal Haria, director, India Ratings and Research, said there could be a 170% increase in retail stress in the banking system. “Of course, this is on a low base as retail did not see a lot of NPAs (non-performing assets),” he said, adding that gross NPAs at the system level could climb to 4.7% in FY22 from 1.6% now. For PSBs, the increase is likely to be 150%, or 1.5 times, and for private banks, it may be 270%, or 2.7 times.

Much of this stress is set to come from unsecured advances. The share of unsecured exposures in private banks’ gross advances is roughly 15%, while for PSBs, it is roughly 5%. “It is logical here to assume that the retail stress would be seen more in private sector banks than PSBs. PSBs also have clients on the advances side where they would be salaried or from public sector entities or the government. So, therefore, the expectation is that qualitatively they would be somewhat better than private sector banks,” Haria said.

Even as private banks do relatively robust credit underwriting, they do look for high yields in the unsecured segment, and that may not necessarily play out well for them, analysts at India Ratings said. For traditional services employees, who are the mainstay of some of these unsecured products, income growth is declining in terms of wage growth rate. Also, the growth in employment is much lower as compared to what was seen between 2011 and 2016. These two factors are somewhat contradictory to a growth bounce-back being seen in the retail unsecured segment, Haria said.

While stress in the retail segment may not necessarily be manifested this year or the next, India Ratings believes that the trends in individuals’ income growth and the quality of banks’ unsecured assets cannot be divergent for long. “Somewhere, the retail unsecured asset quality and the growth in retail income should converge. When they will converge, we can’t say,” Haria said.

India Ratings has upgraded its FY21 credit growth estimates to 6.9% from 1.8%, and 8.9% in FY22, with the improvement in the economic environment in 2HFY21 and the government’s focus on higher spending, especially on infrastructure. The agency estimates gross NPA at 8.8% in FY21 (FY22: 10.1%) and stressed assets at 10.9% (11.7%). Provisioning cost has fallen from its earlier estimate of 2.3% for FY21 to 2.1% and is estimated at 1.5% for FY22.

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