India private banks see higher levels of small loan defaults until mid-2025
Indian private banks say they expect increases in defaults on small and personal loans due to slower economic growth to continue till the middle of this year.
But the short nature of micro credit and personal loans, typically 12-18 months long, and tighter lending rules unveiled in November 2023 means pressure on their asset quality is unlikely to last beyond that, they add.
The gross bad loan ratios of private banks rose between 1 and 14 basis points in the October-December period from the preceding quarter to range between 1.42% and 4.7% of total loans.
India expects to log economic growth of 6.4% in the year ending in March, its slowest pace in four years.
The resulting rise in sour loans and tighter lending rules have made banks cautious about micro, personal and credit card loans in particular. That's led to a slower pace of bank credit growth in December for a sixth consecutive month.
Ashok Vaswani, CEO of Kotak Mahindra Bank, told an analysts' call last month that delinquency trends in personal loans improved in the December quarter, while those for credit cards plateaued and will decline in the next few quarters.
Kotak, the No.4 private lender by assets, remains watchful of micro credit loans given to borrowers in rural areas for small business needs, where stress could take "at least another quarter" to normalise, he added.
India's rural economy has suffered from aggressive lending practices and disruptions brought on by national and provincial elections, leading to a rise in defaults, according to analysts.
But rural demand has revived over the last few quarters after a good monsoon season, while the financial health of large corporates and demand for mortgages - two key engines for credit growth - remain largely intact.
IndusInd Bank, the country's No. 5 private sector lender, has been one of the most affected by defaults with its gross bad loan ratio climbing 14 basis points to 2.25% in the December quarter over the preceding period.
Even so, it expects asset quality in its micro credit portfolio to start stabilising from the April-June quarter, CEO Sumant Kathpalia told an analysts' call.
The Reserve Bank of India also does not expect a dramatic climb for the sector's bad loan ratio, predicting it will rise to 3% by March 2026 from a 12-year low of 2.6% in September 2024.
India's bank sector index is down 1.4% this year, underperforming the broader market's 0.4% loss.
Mirae Asset Investment Managers (India) has a positive view on the sector over 18-24 months due to attractive valuations, said its Mumbai-based fund manager Gaurav Kochar.
"The peak of the stress in the unsecured and microfinance segment is largely behind us," he said. "Private lenders are trading at a discount in terms of last 5 years mean on price-to-book value, which is a trigger to buy."
