Rising unsecured loans in India may soon face risk of defaults, warns UBS
A RAPID growth in unsecured personal loans from Indian lenders may soon become a headache amid deepening concerns over the rising risk of defaults among households, said UBS Group.
The brokerage sees credit costs for Indian lenders climb towards historical averages as more unsecured retail loans turn sour. State-run banks are more vulnerable to this trend, compared with their private-sector counterparts.
“We see increasing default risks in retail unsecured loans, which is likely to push up their credit losses by 50 to 200 basis points,” wrote analysts Vishal Goyal, Anish Rai and Yash Agarwal in a note. Earlier this month, the country’s banking regulator, the Reserve Bank of India (RBI), exhorted lenders to assess their risk strategies on their personal-loan exposures.
UBS warned that the risk of regulatory tightening is high after RBI governor Shaktikanta Das said last week that the central bank wants banks to be mindful and “smell where the crisis is likely to come up”. Usually, such suggestions from the regulator are followed by tighter macro-prudential norms for lenders.
Reflecting some of the angst, the National Stock Exchange of India’s bank gauge declined as much as 0.9 per cent led by Axis Bank and the State Bank of India (SBI). UBS downgraded SBI to “sell”, while Axis Bank was cut to neutral rating.
“While valuation seems inexpensive, we see limited scope of a re-rating, considering our expectations of decelerating earnings growth,” said UBS.
Unsecured retail loans such as credit cards and personal loans have grown at an annual rate of 23 per cent over the past five years in India, noted UBS. This has outstripped the increase in overall credit in the system as many have resorted to borrowing to meet personal expenses amid plummeting household savings and the effects of the Covid-19 pandemic.
The share of borrowers with more than five personal loans rose to 7.7 per cent in March 2023, compared with 1 per cent in 2018, said UBS. It added that incremental disbursements to borrowers with a “weaker credit profile” exposes the segment in a downturn. As much as 52 per cent of the personal loans portfolio at state-owned banks was to “medium- to high-risk” borrowers, while the share for private-sector banks was pegged at 31 per cent as of June. BLOOMBERG
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