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Hanging on to the good numbers, for now

The RBI’s FSR report indicated that Indian banks are still in a healthy position. Gross NPLs declined 40 bps to ~2.8% in 2HFY24. RoE is at a decadal high at ~14%; RoA has touched 1.3%. Near-term forecasts on NPLs are still being lowered. Loan demand is slowing down in certain specific sectors. Deposit growth has been weak and historical evidence suggests the likelihood of a slowdown in loan growth to converge this gap. Discussion on unsecured loans continues in this report, but it is still less worrisome for banks, at this point.

NPL ratios still declining; return ratios still improving

Key takeaways from the report: (1) Gross NPL ratio for 2HFY24 declined 40 bps to 2.8% for banks, while net NPL ratio also declined ~40 bps during 2HFY24 to 0.6%. (a) Gross NPLs in the industrial credit book declined to 4.8% from 23% in FY2018. (b) Gross NPLs for PSU banks continue to march lower to 3.7% (5.2% in FY2023). (c) Delinquencies in the retail portfolio for banks are on a downtrend, including the SMA portfolio. (d) The RBI is still revising the severe stress scenario downward for the system (2.5% for FY2025 from 3.1% for 2QFY25). (2) Capital is at comfortable levels to manage growth and near-term stress. (3) Deposit growth is a challenge, but the historical experience suggests a slowdown in credit growth to close the current gap between deposit and credit growth. (4) RoE at ~14% and RoA of 1.3% has improved, led by NIM expansion and lower provisions.

Unsecured loans: Trends not showing any stress for banks

There has been strong growth in the unsecured retail loan portfolio and the regulator has stepped up efforts to slowdown credit growth in this segment by increasing the risk-weighted assets. This has resulted in some slowdown in the growth of unsecured retail during FY2024. The headline gross NPL ratios are still not showing any signs of stress yet. Gross NPLs in the retail portfolio are at 1.2%. SMA 1 and 2 in this portfolio are at 2.6%. Within this, the unsecured loans NPL ratio is at 1.5% (1.6% in FY2023) and SMA 1 and 2 are at 2.1% (2.3% in FY2023). The stress level is relatively higher in the smaller ticket personal loans, but the share of banks in this segment is relatively lower. Even if there is a higher risk, the contribution to overall loans is likely to be even smaller. Similarly, there are a few other early warnings signs: (1) Ever 90+ on the 12 MOB portfolio remains elevated at 8.2%. (2) >50% of incremental retail borrowers had three live loans at the time of origination and (3) >33% of incremental retail borrowers had availed >3 loans in the past six months. We should see the stress levels peaking over the next 12-18 months, as most of these loans would either be repaid or would slip into delinquent pools. Based on our conversations, we should expect an increase in delinquency levels from the current lower levels, but there are no signs as yet that this would have a serious impact on our assessment of asset quality metrics for all banks.

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