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Mumbai: India Ratings and Research has revised the outlook for the banking sector to stable for FY22, but retail stress in the system is expected to substantially rise, the rating agency said on Monday.

Stressed assets in individual loans are expected to increase almost 1.7 times in the second half of FY21. For state-owned banks, it could further increase to 2.9% in FY22 from 2.1% in FY21.

For private banks it could increase from 1.2% to 4.3%. Stressed assets comprise bad loans and restructured loans and is a more accurate measure of delinquencies for banks.

The reason for the higher stress in retail loans of private banks is because of the segment’s higher exposure to unsecured advances, which offer better returns to lenders, albeit at a higher risk. “A lot of this stress comes from unsecured advances. The share of unsecured exposure in private banks gross advances is roughly 15%, and for public sector banks (PSBs) it is roughly 5%," said Jindal Haria, a director at India Ratings and Research.

Haria said PSBs also have clients on the advances side who draw salaries from public sector entities or the government and, therefore, the expectation is that qualitatively, they would be somewhat better than private sector banks.

“Private sector banks, on the other hand, do relatively robust credit underwriting but they also look for yield in this segment and, I think, some of those things may not necessarily play out well for private sector banks. However, they have tightened their filters."

Haria said the rating agency expects income growth to decline for traditional services employees, probably the mainstay of a section of unsecured loans.

Besides, the employment growth is much lower compared to what was seen in 2011, 2012 and 2014 or 2016, and this is contradictory to growth in unsecured retail loans, he added.

The rating agency said it has revised the outlook for the sector, considering substantial steps were taken to address the system-wide coronavirus-led stress, which will reduce bad assets to below expected levels.

Banks have strengthened their financials by raising capital and building provision buffers and, therefore, India Ratings has upgraded its FY21 credit growth estimates from 1.8% to 6.9%, and to 8.9% for FY22 due to the improvement in the economic environment in the second half of FY21.

The agency estimates gross bad loan ratio for the sector at 8.8% in FY21, 10.1% in FY22, and stressed assets at 10.9% in FY21 and 11.7% in FY22. Meanwhile, the Reserve Bank has projected bad loans to reach a decadal high in September under both, baseline and severe stress scenarios owing to covid-19.

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