Souring credit card loans, and how Shaktikanta Das saw it coming

Mumbai: India's central bank's prognosis on rising stress in the unsecured segment is beginning to show up on the books of lenders, sending them scurrying to increase provisions and take other measures.

In the first quarter of FY25, several lenders saw a sharp spike in bad loans in both personal loans and credit card portfolios. For instance, IndusInd Bank's non-performing assets (NPAs) on credit cards jumped to ₹334 crore in Q1 of FY25 from ₹268 crore at the end of the March quarter.

Sumant Kathpalia, CEO of IndusInd Bank said during its Q1 earnings call that some stress will be seen in the card business in the next two quarters. “If you look at the 60-plus and 30-plus DPDs, the 30-plus looks 7% right now. So, it's not looking completely good. You will see some flows which will happen on the card business," said Kathpalia, adding that things are under control. DPD refers to days past due.

Until the first quarter, the management sounded cautious on growing the unsecured loan book, while denying any signs of build-up in stress in the portfolio. But the tone change in management commentary was apparent during the Q1 earnings call.

Similar for KMB

The story is similar for Kotak Mahindra Bank as well. “We have seen a certain level of stress in certain pockets on consumer, retail unsecured assets, particularly at the low-ticket levels, and in certain segments where the customer has got overleveraged," said Ashok Vaswani, chief executive officer, Kotak Mahindra Bank during the Q1 earnings call, adding that the bank is maintaining sharp focus on these segments.

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“Credit cost at the bank increased to 55 bps annualized and increase is largely due to losses in unsecured retail book in lower-ticket segment and select geography for micro-credit business," Vaswani said.

Experts credited the Reserve Bank of India (RBI) for spotting trouble before the banks did.

In a note on 7 August, Suresh Ganapathy, MD, Head-Financial Services Research, Macquarie Capital Securities, said, “(RBI) had clearly seen stress in unsecured segment, over-leveraging of consumers, even warned all banks and NBFCs many times and finally had to act on increasing RWAs. Look now what has happened." RWAs refer to risk-weighted assets, which are assigned to each loan category depending on the perceived risk of defaulting.

“While most management teams are downplaying it as a temporary issue, a closer look at the past year's data paints a different picture," said Ashutosh Mishra, head-research, institutional equities at Ashika Stock Broking. "It's crucial to monitor this closely as signs of over-leveraging are evident, as pointed out by various monitoring and regulatory agencies."

What RBI did

RBI had been cautioning banks on increased lending to the unsecured segment since March 2023. Personal loans grew as demand for credit increased in the post-covid era, led by segments such as small-ticket loans, gold loan and credit cards. These segments had seen a growth of 33% on average for the past couple of years, more than double the 12-14% growth in credit, according to data from RBI.

Sensing a potential build up of stress, RBI announced an increase in risk weights on unsecured lending and exposure to NBFCs in November last year, which made banks set aside larger amounts of capital on such assets.

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The central bank's financial stability report in June 2024 showed that delinquency levels among borrowers with personal loans below ₹50,000 remain high, driven mainly by NBFC fintech lenders and small finance banks.

Little more than half the borrowers in this segment have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months, the report said.

Banks take action

While the growth in unsecured loans has moderated to 20-25% this year, stress is now beginning to be visible in the portfolio of banks, resulting in higher provisioning.

For example, ICICI Bank saw a 85% quarter-on-quarter (q-o-q) growth in provisions in Q1 of FY25 to ₹1,332 crore, whereas Axis Bank's provisions rose 72% sequentially and 97% year on-year (y-o-y) to ₹2,039 crore in Q1 FY25. Federal Bank’s provisions were 141% higher q-o-q and 10% y-o-y, and IndusInd Bank’s were 10% higher q-o-q and 6% y-o-y.

Further, banks have also started taking steps to manage the stress on the books by expanding their collection workforce, reducing dependence on direct sales agents (DSAs), and putting in place score cards and early warning systems.

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"We are seeing increase in credit costs across the retail unsecured portfolios, which is to be expected given that you can't remain at trough levels on a through-cycle basis," said Puneet Sharma, chief financial officer, Axis Bank, during the Q1 earnings call.

With growth in unsecured loans slowing down and borrowers unable to get loans to repay their previous loans, bankers are hoping that this cycle will peak by December-end once the festive season gets over.

“If monsoon is not well distributed, then the microfinance institutions' problem will be pronounced in Q3," said a senior official at a private sector bank on condition of anonymity. “Festive season starts from 18 August to 25 December. Borrowing will go up during this period. I believe peak on unsecured loans will be December-January. Usually borrowing during festive season is higher."