The gross non-performing assets (NPAs) ratio of Indian banks is expected to witness a significant improvement, according to a report by Fitch Ratings. Despite rising stress in retail loans, strong recoveries, robust growth, and effective write-offs are likely to reduce the overall NPA levels. Here’s a closer look at the trends shaping the Indian banking sector.
NPAs to Decline Further by 2025
Fitch Ratings forecasts that the gross NPA ratio of Indian banks will decrease by 0.4%, reaching 2.4% by March 2025. An additional dip of 0.2% is expected in the following financial year. The Reserve Bank of India (RBI) also anticipates the impaired-loan ratio to bottom out in FY25 at 2.6% before increasing to around 3% in FY26.
The improvement is attributed to effective recoveries, steady economic performance, and consistent write-offs. However, challenges persist due to the rising stress in retail loans, particularly unsecured credit.
Rising Stress in Retail Loans
The report highlights that unsecured loans, such as personal loans under ₹51,000 and credit card debt, are contributing significantly to the rising loan stress. These loans, extended primarily by Non-Banking Financial Companies (NBFCs) and fintech firms to low-income borrowers, account for around 52% of new bad retail loans in the first half of FY25.
Despite a compound annual growth rate of 22% in unsecured personal loans and 25% in credit card borrowing between FY21 and FY24, growth has slowed to 11% and 18% year-on-year in FY25 due to increased risk weights on unsecured lending.
Indirect Risks for Indian Banks
Large Indian banks have proportionally lower exposure to riskier loans than the overall financial system. However, indirect risks remain through funding to NBFCs and fintechs, which cater to low-income borrowers or those without income disclosure. These borrowers account for over one-third of the outstanding consumer credit in India’s financial system.
India’s household debt, at 42.9% of GDP as of June 2024, is lower compared to other Asia-Pacific emerging markets. Despite this, the rise in unsecured retail loan stress poses a challenge to the otherwise improving NPA outlook.