Indian banks’ gross non-performing assets (NPAs) ratio may decline by another 0.4 percentage points to 2.4 percent by March 2025, with a further 0.2 percentage point drop anticipated in the following fiscal year, according to a report by rating agency Fitch.
Despite increasing stress in retail loans, particularly in unsecured credit, robust growth, recoveries, and write-offs are expected to offset the rise in non-performing loans, Fitch reported. The current lending stress is concentrated in smaller unsecured personal loans of less than $600.
Large Indian banks have proportionally lower exposure to such riskier loans compared to the overall financial system. These high-risk loans are primarily extended by Non-Banking Financial Companies (NBFCs) and fintech firms to low-income borrowers.
The Reserve Bank of India (RBI) anticipates the impaired-loan ratio will hit its lowest point in the Financial Year 2024-25 (FY25) before increasing to around 3 percent in FY26, from the 2.6 percent reported in the first half of FY25.
Fitch’s report highlighted that the difference from its forecast partly reflects varying opinions on the timing and extent of risk crystallization, banks’ exposure at risk, loan growth, and India’s economic performance.
Unsecured personal loans and credit card borrowing grew at compound annual growth rates of 22 percent and 25 percent, respectively, over the three years leading to FY24. The growth pace slowed to 11 percent and 18 percent year-on-year in the first half of FY25, following an increase in risk weights attached to unsecured lending.
India’s household debt, at 42.9 percent of gross domestic product (GDP) as of June 2024, remains low compared to many emerging markets in Asia Pacific. However, stress in unsecured retail loans is rising, accounting for roughly 52 percent of new bad retail loans in the first half of FY25.
The report also noted that banks may have indirect exposure through funding to non-banks and fintechs, which are more exposed to low-income borrowers. These borrowers, or those without income disclosure, constitute slightly over one-third of the outstanding consumer credit in the financial system.
