Why Indian Banks Continue To Be Concerned Even As Their Bad Debt Goes Down

According to the RBI’s Financial Stability Report, the level of GNPA for public sector banks has fallen from about 3.5 per cent in March 2023 to 1.8 per cent in March 2024. The report noted that the asset quality of all scheduled commercial lenders has also recorded sustained improvement with the GNPA ratio moderating to a 12-year low at 2.8 per cent in March 2024. However, India’s banking sector can't celebrate yet.

While bank NPA rates have gone down, personal loans are rising even though employment and wages aren't. Bankers fear this may be a sign of financial stress which could make such loans turn sticky.

According to the central bank, several borrowers are now parallelly servicing multiple personal loans leading to a surge in overall household debt. A senior official of a public sector bank said that banks have particularly increased monitoring of all small loans.

Traditionally unsecured credit card and personal loans have always attracted higher risk weightage than housing loans. 

“With the rise in economic uncertainties driven by geo-political and geo-economic shifts, banks would need to continuously monitor their books,” Ashvin Parekh, financial services sector analyst and managing partner APA Services.

The RBI noted that the GNPA ratio could further drop to 2.5 per cent by March 2025 but there is a caveat. This is subject to the economy remaining stable.

“It is our endeavour to smell a crisis. Supervision has become a very complex task. We need to realise it is a complex world and our supervisory methods should be our best endeavour to remain sync with time. Not only in sync with times and to see stress before it builds up,” RBI governor Shaktkanta Das recently said at an event.

Rising Personal Loan Graph

In this calendar year, the average growth in personal loan has been lower than 20 per cent ranging between 17 and 18 per cent. But before that personal loans grew by more than 27.5 per cent from Rs 41,80,838 crore in March, 2023 to Rs 53,36,129 crore in March 2024.

“This is too high for the comfort of the central bank and lenders will have to look into this. The RBI has been issuing warnings to banks to ensure things do not go out of hand,” the official said on condition of anonymity.

A surge in personal loans reflects an undercurrent in the overall economic dynamics especially as India claws out of the Covid 19 impact. Loans on credit cards have zoomed as well. The total outstanding amount on credit card loans as of March 31, 2024 stood at Rs 2,57,016 crore, up 66 per cent from Rs 1,54,540 crore a year ago. The gross NPA level on account of credit card loans is inching upward. Besides personal loans, services sector advances have also boosted credit growth.

Household Savings Drop

Concerns have aggravated with the level of household savings in the country dropping to 18.4 per cent of GDP in 2022-23. Between 2013 and 2022, the average was 20 per cent of GDP.

“Rising expenditure, stagnant or decreasing incomes, and the general ease in availability of loans can lead to a substantial rise in NPA,” Abhilasha Jaju, Director, BFSI vertical, 1Lattice said.

Though an increased level of household debt to GDP is considered an indicator of rising income levels and economic growth, a sudden spike especially during a particular time frame when employment generation and income levels have remained stagnant needs careful monitoring as it could be a sign of stress in household finances and could lead to a large number of delinquencies in the high-cost personal loans.