Indian banks face risks amid unsecured retail loan stress: Fitch Ratings

Fitch Ratings has expressed concerns about increasing stress in Indian banks’ unsecured retail loan portfolios, which could challenge projections for asset quality improvements in 2025. The agency had anticipated a decline in the sector’s impaired-loan ratio by 40 basis points (bp) to approximately 2.4% for the financial year ending March 2025 (FY25), with a further 20 bp improvement expected in FY26. However, the projected rise in new bad loans—25% higher in FY25 and FY26 compared to FY24—may disrupt these forecasts.

The rapid growth in unsecured retail lending, including personal loans and credit card borrowing, poses medium-term risks. While Fitch still expects the impaired-loan ratio to decline due to robust loan growth, recoveries, and write-offs, the Reserve Bank of India (RBI) forecasts the ratio could rise to around 3% in FY26, up from 2.6% in the first half of FY25 (1HFY25). Fitch attributes these differing outlooks to variations in risk assessments, loan growth expectations, and economic performance predictions.

Unsecured personal loans and credit card borrowings grew at compound annual growth rates (CAGR) of 22% and 25%, respectively, over the three years to FY24. Growth slowed in 1HFY25 following an increase in risk weights for unsecured lending. Despite India’s household debt being relatively low at 42.9% of GDP as of June 2024, rising stress in unsecured retail loans accounted for 52% of new bad retail loans in 1HFY25. Defaults on these loans could have a cascading effect, as half of such borrowers reportedly hold secured loans, including housing or vehicle loans.

Large banks, though less exposed to riskier small-ticket unsecured loans, are not fully immune. The rise of digital lending and funding to non-banking financial companies (NBFCs) and fintechs, which cater to low-income borrowers, amplifies risks. This borrower segment, accounting for over one-third of the system’s consumer credit, is particularly vulnerable to market downturns, potentially affecting higher-income categories as well.

Fitch-rated banks’ exposure to unsecured personal and credit card loans ranges between 2% and 15% of total loans. While aggressive write-offs by private banks have kept the sector’s bad-loan ratio for unsecured loans at 1.7% in 1HFY24, risks persist. Fitch emphasizes the importance of banks’ risk management practices, noting that their asset quality remains resilient due to strong state support and improved impaired-loan ratios in recent years. However, rising stress in unsecured retail loans could test this resilience in the years ahead.

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