Stress in retail loans could triple by the end of FY22 due to a slowdown in income growth and slower pace of job creation in the service sector, credit ratings firm India Ratings & Research (Ind-Ra) said. It estimated that stressed loans from retail advances could rise to 4.7% of the total in March 2022 from 1.60% in March 2021, led by slippages in unsecured loans — especially at private sector banks.
Jindal Haria, director Ind-Ra, said private sector banks are likely to experience higher slippages from retail loans with total stressed loans increasing about three times, mainly due to their share in unsecured loans.
Despite the rise in stressed loans, retail will continue to drive credit growth for banks with a 15% to 20% growth next fiscal due to consumer demand for buying homes and vehicles even as banks tighten their credit appraisal process.
Ind-Ra, which is an arm of Fitch in India, also revised its outlook on the banking sector to stable from negative in FY22 as lower-than-expected provisions, especially on corporate loans, will likely stabilise bank earnings and support profits. “Substantial systemic measures have reduced the system-wide Covid-19-linked stress below the expected levels.
Banks have also strengthened their financials by raising capital and building provision buffers,” Ind-Ra said, pointing to the provision and capital buffers built by banks after Covid.
The ratings agency expects banks’ credit costs to drop to multi-year lows at 1.5% of loans in FY22 from 2% in FY21, which is half of the recent peak of 4% in FY18. Stressed loans from the large chunky corporate book have fallen to 15.3% of total loans from 20% in FY18, thus keeping credit costs low.