Stress in retail loans of banks may triple by FY22 end: Ind-Ra

Stress in retail loans of banks may triple by FY22 end: Ind-Ra

Mumbai: 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.

Ind-Ra has also raised its credit growth forecast to 6.9% in FY21 from 1.8% earlier and predicts that it will improve further to 8.9% in FY22 due to the improvement in the economic environment and higher government spending.

Gross non-performing assets (NPAs) for the banking system will likely increase to 10.1% in March 2022 from 8.8% at the end of the current fiscal, but higher pre-operating profits and provision coverage ratios will help banks manage the stress, Ind-Ra said.

The outlook on public sector banks has also been revised to stable from negative in FY22 due to improvement in the banks’ capital position, higher provision coverage, lowerthan-expected Covid-19 stress and minimal surprises arising out of public sector bank mergers.

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