Banking Sector Set for Best Decade-High Performance Amid Rising Unsecured Loan Stress, Crisil Reports

The non-performing assets (NPA) ratio in India's banking system is projected to improve to 2.5% by FY25, according to Crisil. However, concerns over unsecured loans like credit cards and personal loans, as well as microfinance loans, remain. Credit growth is expected to moderate, and profitability might be affected by higher deposit costs.

The non-performing assets ratio for India's banking system is anticipated to hit a decadal best of 2.5 percent in FY25, domestic rating agency Crisil announced on Tuesday.

Despite this positive outlook, Crisil flagged concerns about stress in unsecured loans such as personal loans and credit cards, and in microfinance (MFI) loans. These segments are seeing a surge in strain.

Credit growth is projected to slow to 14 percent in FY25 from 16 percent in FY24, due to lower expected economic growth of 6.8 percent compared to 8.2 percent in FY24, as well as regulatory measures like higher risk weights on unsecured lending that have made lenders cautious.

Senior Director and Chief Ratings Officer Krishnan Sitaraman stated that despite a slower pace, the 14 percent credit growth makes FY25 one of the fastest-growing years in the last decade.

Past setbacks caused by GNPAs have seen significant improvement, with the ratio expected to drop to 2.5 percent in FY25 from 2.8 percent the previous year. However, signs of stress remain in unsecured and MFI loans.

Unsecured loan GNPAs are expected to increase to 2 percent at the end of FY25 from 1.5 percent a year earlier, while advances overdue by more than 30 days but not yet recognized as GNPAs will rise to 2.5 percent from 2.1 percent.

MFI credit costs are forecast to climb to 3.5 percent from 2 percent at the end of FY24, and collection efficiencies will drop by 2-3 percentage points below the 98 percent at the end of FY24.

Factors contributing to MFI stress include borrower over-leveraging, loan waivers, and elections in some states. In unsecured loans, stress primarily comes from higher delinquencies in exposures less than Rs 50,000.

Sitaraman noted that the impact from MFI and unsecured loans on broader asset quality is expected to be minimal due to their small proportion in the overall book.

The corporate sector, making up over 45 percent of exposure, is expected to significantly contribute to the enhancement of the overall book.

However, the agency forecasts that improvements in asset quality may not lead to increased profits, with net interest margins potentially dipping by up to 0.20 percent due to rising deposit costs.

On deposit mobilization, Sitaraman highlighted that the gap between deposit and credit growth is closing, with deposit growth aligning closer to the 14 percent credit growth figure.

(With inputs from agencies.)