Fitch Predicts Decline In Indian Banks’ NPAs Despite Rising Stress In Unsecured Loans

The gross non-performing assets (NPAs) of Indian banks will likely decline by 40 basis points to 2.4% by March 2025, with a further 20-basis-point reduction projected in the next financial year, according to Fitch Ratings.

Fitch said in a statement noted that stress in retail loans is growing, especially in unsecured credit. However, strong growth, recoveries, and write-offs are likely to balance out the rise in new bad loans.

The Reserve Bank of India (RBI) estimates the impaired-loan ratio will hit its lowest point in FY25, before rising to around 3% in FY26.

The report shows the ratio at 2.6% in the first half of FY25 (1HFY25).

Fitch stated, “We believe the difference from our forecast partly reflects variance of opinions on the timing and extent of risk crystallisation, banks’ exposure at risk, loan growth and India’s economic performance.”

Impact Of Unsecured Loans On Banks’ NPAs

Unsecured personal loans and credit card borrowings grew at a compound annual growth rate of 22% and 25%, respectively, over three years leading to FY24.

However, growth slowed to 11% and 18% year-on-year in 1HFY25 due to higher risk weights on unsecured lending.

India’s household debt, at 42.9% of GDP as of June 2024, remains low compared to many emerging markets in the Asia-Pacific region.

However, unsecured retail loans accounted for 52% of new bad retail loans in 1HFY25, signaling rising stress.

Defaults in unsecured loans could have wider repercussions, as 50% of borrowers hold at least one high-value secured loan, such as for housing or vehicles, which may also be impacted.

Fitch noted that lending stress focuses on unsecured personal loans of less than $600 (approximately Rs 51,000).

Although large Indian banks have lower exposure to these riskier loans, their aggressive loan growth strategies and increased digital lending make them not fully insulated.

Banks may also face indirect risks from funding non-banking financial companies (NBFCs) and fintechs, which are more exposed to low-income borrowers.

Such borrowers, or those without income disclosure, represent over one-third of the system’s consumer credit. Fitch cautioned that risks could extend to higher-income categories in the event of a market downturn.

However, borrowers in these segments will likely demonstrate greater financial resilience.

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