Mumbai: Consumer bad loans are piling up at banks and non-bank finance companies, or NBFCs, especially in smaller cities and towns.
Rating company Crisil Ltd blamed the rising defaults on the aggression with which the lenders pushed loans to individuals between 2003 and 2007, when the economy was on a roll.
An increase in the proportion of unsecured loans, exposure to high-risk customers with limited track record, rising interest rates and declining credit standards have contributed to the rising non-performing assets, or NPAs, said Raman Uberoi, senior director at Crisil, in a teleconference with reporters on Thursday.
The credit assessor does not see a crisis yet but, “some lenders will suffer significant losses as asset quality continues to weaken,” said Tarun Bhatia, head of financial sector ratings at Crisil.
“We expect gross NPAs in retail loans to rise to around 4% by March 2009, from 2.7% in March 2007,” Bhatia said.
The banking system can absorb the hit but lenders heavy on unsecured loans and with exposure to high-risk customers risk significant losses, he said.
Rising inflation and interest rates have made loans more costly to repay for consumers who borrowed to buy apartments, cars and durables during the economic boom of the last four years.
Indian banks’ outstanding loans to individual customers are estimated at Rs5-Rs5.5trillion.
The rise in exposure to higher-risk customers is mainly through personal loans and credit cards that made up 17% of total outstanding retail loans in March 2007, up from 6% in 2004, Crisil said.
Unsecured loans would be close to 18-20% of the overall retail loan portfolio.
Crisil’s findings are in sync with the concerns of the Reserve Bank of India, or RBI, over the increase in housing and other consumer loans.
RBI has capped credit growth in fiscal 2009 at 20%. Crisil expects credit growth to decline to 16-17%. Retail loan growth will range between “high single digits” and 10-12%, it added.