Mid-2010s, many banks used to give out large loans to huge firms. Consequently, when these companies failed, their loans became non-performing. It took a few years for the problem of bad loans to surface. After reviewing in 2015, Reserve Bank of India (RBI) highlighted a lot of problems that had been hidden until then. Bad loan ratio reached almost close to 10% in 2017 meaning that one out every ten loans was turning bad. Debt recovery mechanisms including Insolvency and Bankruptcy Code, 2016 were employed among other strategies.
It was newsworthy because they lent relatively high amounts of money to famous companies which later failed to pay back these debts.
This culminated into few bank lending towards industries. They also went a step further by reducing more non-performing assets in their books. Eventually , in 2024, banks came back on their feet once again. In March this year; the latest Financial Stability Report (FSR) reveals that Gross Non-Performing Assets (GNPA) are at the lowest level since the beginning of this decade as shown in Chart 1 below .
NPA is defined as outstanding loan balances overdue for more than three months .
Chart 1 | The chart shows the Gross non-performing Assets (GNPA) and NPA across years.
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However, the decline in industry lending meant that banks had no option but seek alternative areas where they could lend and make returns from it. Also during mid-2010s there was an increase in advances give to retail sector. This included personal loans, credit card receivables, housing loans, etc… Simultaneously instant loan apps emerged during this period preying upon innocent customers mainly young people with greater digital exposure for further credit leading them into debt traps.
The retail sector surpassed both manufacturing and services combined with highest number of outstanding loans. RBI was alarm with the rapid growth and took some regulatory action. But overall, it looks good. In the case of personal loans, however, the GNPA ratio has consistently fallen from 1.2% in March 2024, which is the lowest level across sectors and within this segment (Chart 2).
Chart 2 | The chart shows the GNPA (in %) across sectors.
But even if there is no cause for alarm yet, there are reasons why RBI is worry. It has pointed out two indicators of impending stress in FSR report released recently. The first indicator relates to slippages which means fresh additions of bad loans during a year. There is an increasing share of slippages from retail loans into total new NPA additions by their percentage. Fresh NPAs that arose out of retail credit accounted for about two-fifths (home loans excluded).
Chart 3 | The chart shows the bank-type wise split of the share of slippages from retail loans in the overall new additions of NPAs. The chart excludes slippages in home loans. Slippages are fresh additions of bad loans in a year.
Delinquency levels for personal loans below Rs. 50,000 are persistently high in small finance banks and NBFC-Fintechs (Chart 4). The second sign is the level of delinquencies. Even if an account is overdue on dues for a day, it will be termed as a delinquent one. Continual delinquencies will eventually make an account non-performing asset (NPA). Delinquency levels among small borrowers with personal loans below Rs. 50,000 remain high. Reportedly, most of these were sanctioned majorly by NBFC-Fintech lenders RBI report points out that most of these loans were approved mostly by NBFC-Fintech lenders who are the main drivers behind digital lending apps which process loan applications within few hours. In the period between April 2021 and July 2022, Google reviewed about 3500-4000 loan apps and removed or suspended over 2500 from its Play Store. However an individual is worry this time and not industries.
Source: Financial Stability Report- June 2024, Trend and Progress of Banking in India, Press releases of the Reserve Bank of India, Rajya Sabha
