Credit Suisse expects delinquencies at 5-10% for pvt banks, 9-12% for NBFCs
Stress in retail loans had started building up around this time last year, owing to the slowdown in economic activity. The pandemic and subsequent lockdown may have added to stress, if the September quarter (Q2) results of India’s largest retail lenders across segments — HDFC Bank, Bajaj Finance, and SBI Cards — are anything to go by.
In case of HDFC Bank, for instance, retail growth at 5.3 per cent year-on-year was at a decadal low, and so was the share of retail loans at 46.7 per cent.
Except personal loans and credit cards, retail growth was even lower. HDFC Bank’s high share of unsecured loans — at 16 per cent of its retail book — poses a risk, while the secure pockets of auto and housing loans continue witnessing a decline in growth.
In the case of Bajaj Finance, the worrying factor was the sharp and unprecedented rise in the pool of 60 day-plus overdue loans (60DPD). The consumer (wholesale and retail) and auto loan pockets, which account for over 65 per cent of total loans, witnessed the 60DPD ratio rising from 1.2-1.5 per cent (10 per cent in auto loans) to 7-25 per cent.
Therefore, even if collection trends improve as indicated, normalisation may be many quarters away.
SBI Cards’ Q2 was more alarming, with the gross nonperforming asset ratio surging to 4.3 per cent — up from 1.4 per cent in Q1. The card issuance data suggests that in present conditions, the lender would prefer caution to growth. Though prudent as a strategy, slow growth could drag the overall asset quality down.
Based on the initial assessment of Q2 results, analysts at Credit Suisse have forecast delinquencies in retail loans to come in at 5-10 per cent for private banks and 9-12 per cent for non-banking financial companies (NBFCs).
“Early reporting on segment-level delinquencies in Q2 indicates wide variances in consumer loan delinquency — trending at 17 per cent and 21 per cent in credit cards and two wheelers, respectively, 10-11 per cent in the microfinance and tractors segments, less than 10 per cent in commercial vehicles, and 3-7 per cent in business banking and LAP (loan against property),” they note.
Improving trends in monthly collections is a critical assumption while extrapolating these numbers.
Suresh Ganapathy of Macquarie Capital remains unchanged on his estimates of total gross addition to stressed assets, at 8-10 per cent over the next nine months. He expects half the moratorium book to come under stress.
“Some (lenders) argue that 80 per cent (of the moratorium book) will be fine, and only 20 per cent could be stressed. We find it difficult to digest how a customer could pay the dues for September or October, when he has not paid up for six months,” he points out.
Ashish Singhal, managing director of Experian Credit Information Company India, partially agrees with Ganapathy, saying collection efficiency is 200-400 bps below pre-Covid levels, indicating deterioration in asset quality.
“Some customers thought the Supreme Court’s stay on NPA recognition was an extended moratorium,” he adds. If not for this, NPA numbers would have been different. Hence, the months ahead will be crucial for judging retail asset quality. Much of it would depend on the financial position of borrowers, along with the lender’s willingness in growing its books.
“We are not seeing a shift to low-rated consumers availing of loans. However, in terms of actual portfolio performance and scores, the next 2-3 months are critical,” cautious Singhal. For now, rating agencies say enquires are increasing for homes loans, auto loans, and credit cards vis-à-vis personal loans – indicating a lower chance of revolving loans to meet monthly dues.
Axis Bank, ICICI Bank and IndusInd Bank are set to disclose their Q2 numbers this week. Their commentary will be important to judge if the retail credit cycle has run its course.