A rise in defaults by over-leveraged small borrowers is hitting India's top lenders, with bank executives and analysts expecting higher levels of stress in the personal loans and micro-credit segments over the next year.
The rise in defaults marks a turn in the credit cycle for Indian lenders, whose bad loans dropped to a multi-year low of 2.8% of all assets as of end-March, according to central bank data.
In the September quarter, however, five of the eight largest private sector banks have reported an increase in bad loans.
HDFC Bank (HDBK.NS), Kotak Mahindra Bank (KTKM.NS), IndusInd Bank (INBK.NS), RBL Bank (RATB.NS) and IDFC First Bank (IDFB.NS) saw gross bad loans as a percentage of total assets rise between 2 basis points and 19 basis points during the quarter.
Most banks have also increased provisions, or funds set aside to cover bad loans, in anticipation of a rise in defaults.
The surge in retail loan defaults comes against the backdrop of a booming economy, which is seen expanding 7.2% in the current year to March 2025 with bank lending growing at twice that pace.
Segments such as personal loans and credit cards, in particular, saw much faster growth, in excess of 25% until earlier this year, forcing the central bank to step in to curb "exuberance" in retail lending.
Slippages, or the proportion of good loans turning bad, would be elevated and stress could remain high "for the next 3-4 quarters at least", said Pranav Gundlapalle, senior research analyst at Bernstein.
Rising defaults, along with higher capital requirements imposed on banks last year, and series of actions against exuberant lending practices have slowed growth in segments such as personal loans and credit cards.
While a moderate worsening of asset quality may not be an immediate cause of concern for well-capitalised banks, the trend of rising bad loans and slowing retail loan growth could weigh on their profitability outlook, analysts said.
"We do see a general trend, particularly in unsecured (loans), where there is stress across multiple segments," said Arjun Chowdhry, group executive for segments including cards and retail loans at Axis Bank (AXBK.NS), the country's third-largest private lender.
Stress is being driven by "indebtedness" caused by over-leveraging, Chowdhry said on an analyst call.
RISING DEFAULTS
The surge in bad loans is being seen mainly among borrowers who have three or more unsecured personal loans, said Rajeev Jain, managing director of Bajaj Finance, India's largest retail non-bank lender, due to easy access to funding amid extensive competition to gain market share.
For example, Harpal Singh, a 45-year old Mumbai resident whose annual income is 780,000 Indian rupees ($9,278), racked up personal loans and credit card debt of five million rupees over the last six years and is now struggling with the repayments.
"Medical emergencies have completely wiped off my savings and the general cost of living in Mumbai is so high that there is hardly anything left to pay," Singh said.
Defaults have also risen in the microfinance segment, which includes loans given to low-income borrowers.
Climate-related disruptions to crops have eroded incomes in rural areas, said a banker with a state-run bank, declining to be identified as they are not allowed to speak to the media.
The central bank, which this month barred four non-bank lenders from fresh lending due to "usurious" pricing practices, has sought data from microfinance firms on loan spreads, said five sources familiar with the requests.
The sources declined to be identified as they are not authorised to speak to the media. An e-mail sent to the central bank was not answered.
($1 = 84.0740 Indian rupees)
(This story has been refiled to add a name in the editing credits)
