Rising Pressures in Private Sector Banks' Unsecured Loan Portfolios in India

In recent years, India's private sector banks have faced mounting pressure, especially when dealing with unsecured loan portfolios. With the second quarter of FY24 wrapping up, many banks have reported increasing stress in segments like microfinance, credit cards, and personal loans. Interestingly, HDFC Bank stands out as an exception, maintaining stable asset quality amidst this trend. This blog dives deep into the challenges faced by private banks, offering insights for investors, traders, banking professionals, and financial analysts.

Private Banks See Surge in Stress Across Unsecured Loan Segments Amid Q2 FY24

India's private sector banks have been navigating turbulent waters, primarily within their small-ticket loan portfolios. The second quarter of FY24 has brought to light significant challenges in unsecured segments, compelling banks to reassess their strategies. The major private banks, with the notable exception of HDFC Bank, are grappling with a surge in bad loans, shedding light on the vulnerabilities inherent in these loan categories.

The rise in these unsecured loan defaults is a reflection of broader economic pressures. Despite the alarming statistics, there's still an opportunity for private banks to recalibrate their approach, ensuring resilience and adaptability. For stakeholders, understanding these nuances is critical to making informed decisions about future investments and strategies.

Axis Bank Unsecured Loans Lead to Surge in Slippages

Axis Bank found itself at the epicenter of turbulence, witnessing a 36% year-on-year surge in gross slippages that reached ?4,443 crore. This spike was predominantly driven by unsecured loans, underscoring the challenges of managing such portfolios. Despite this, Axis Bank showed impressive resilience. By executing strategic write-offs totaling ?3,119 crore, the bank successfully reduced its gross non-performing assets (GNPA) ratio to 1.44%, down from 1.73% a year ago and 1.54% in the previous quarter.

This proactive approach highlights the importance of contingency planning. By utilizing a one-time tax refund of ?550 crore to bolster contingency provisions, Axis Bank fortified its financial buffer. Consequently, the bank's net profit rose significantly, reaching ?6,918 crore in Q2 FY24 from ?5,864 crore a year earlier.

Kotak Mahindra Bank Credit Card and Microfinance Portfolios Under Pressure

Kotak Mahindra Bank wasn't spared from the challenges either. The bank reported significant slippages amounting to ?1,875 crore, marking a 38% sequential and 42% year-on-year increase. The primary culprits? Rising stress in the credit card and microfinance portfolios, driven by challenges in rural segments and over-leveraging among customers.

Despite these hurdles, Kotak Mahindra Bank managed a modest 5% growth in net profit year-on-year, reaching ?3,344 crore. CEO Ashok Vaswani pinpointed stress in rural areas, especially in commercial vehicles, tractors, and microfinance, with 30-40% of slippages originating from the credit card segment. This emphasizes the need for banks to adapt their strategies to cater to diverse customer segments effectively.

HDFC Bank Outlier with Stable Asset Quality

In contrast to its peers, HDFC Bank emerged as a beacon of stability. Its GNPA ratio was a commendable 1.4% as of September, only slightly higher than the previous quarter’s 1.3%. This stability is attributed to the bank's deliberate strategy of slowing down unsecured loan growth, which was capped at 10% for FY24, down from 19% in FY23.

However, HDFC Bank did face challenges in its agricultural loan portfolio, where stress remained elevated. Yet, its overall financial health remained robust, with net profit rising to ?16,821 crore in Q2 FY24, up from ?15,976 crore a year earlier. This performance exemplifies the bank's adeptness at navigating challenging credit environments, setting a benchmark for others in the industry.

Industry-Wide Trends Growing Delinquencies in Unsecured Loans

The rise in bad loans, particularly in unsecured categories, isn't isolated to individual banks—it's a broader industry trend. According to TransUnion CIBIL, credit card dues with repayments delayed by over 90 days increased by 17 basis points year on year to 1.8% in June 2024. This uptick in defaults can be traced back to borrowers exhausting their credit limits and struggling with repayments.

While the surge in delinquencies hasn't reached critical levels, banks remain vigilant. They're closely monitoring portfolios for any signs of further deterioration. Arjun Chowdhry, Axis Bank’s group executive and head of retail assets, emphasized the importance of vigilance, stating that the bank is actively monitoring its portfolio to take necessary actions as required.

RBL Bank Microfinance Sector Faces Prolonged Stress

RBL Bank is another institution feeling the heat, particularly in its microfinance and credit card portfolios. During the quarter, the bank reported fresh bad loans worth ?1,026 crore, pushing its GNPA ratio up to 2.88%. This surge has consequently driven provisioning costs up by 59% year on year to ?618 crore.

Despite these challenges, RBL Bank posted a modest 2% increase in net profit, reaching ?223 crore by the end of Q2 FY24. Management indicated that while there has been some improvement in the credit card segment, the microfinance industry is expected to face prolonged challenges, with stress likely to persist for a few more quarters.

Growth in Personal Loans and Credit Cards Continues

Interestingly, even as delinquency rates rise, private banks continue to see growth in their personal loan and credit card portfolios. HDFC Bank reported a 3.5% increase, followed by Axis Bank at 2.6%, and Kotak Mahindra Bank with a 1% rise.

Kotak Mahindra Bank, despite facing restrictions from the Reserve Bank of India on issuing new credit cards, adopted an aggressive growth strategy. It acquired Standard Chartered Bank’s personal loan portfolio worth ?4,100 crore, giving the bank access to an affluent customer base and enhancing its ability to improve credit quality and profitability in the long term.

Outlook Uncertain Times Ahead for Unsecured Lending

The trajectory of unsecured loan delinquencies remains a point of concern for the banking sector. While the current figures aren't alarming, the trend continues to challenge the sector. Industry experts and bankers remain cautious, uncertain about when the stress will peak. With slippages continuing to rise in credit cards and microfinance portfolios, the focus remains on prudent portfolio management and effective risk mitigation strategies.

As the fiscal year progresses, banks must strike a delicate balance between growth in retail lending and stringent risk management practices. Doing so will be crucial in navigating the growing uncertainties in unsecured lending segments.

In Summation Navigating the Challenges of Unsecured Loans

The recent trends in India's private sector banks illustrate the complexities of managing unsecured loan portfolios. While several institutions grapple with rising stress and slippages, banks like HDFC Bank showcase the importance of strategic foresight and adaptability.

For investors, traders, banking professionals, and financial analysts, understanding these dynamics is crucial. It offers insights into potential investment opportunities and helps gauge the broader economic landscape.

To stay ahead, continuous monitoring of industry trends, proactive risk management, and strategic adaptations will be essential. The landscape of unsecured lending is evolving, and those who adapt will find new avenues of growth and resilience.

Feel free to share your experiences and insights in the comments below. Let's continue the conversation and grow together as a community of traders and analysts.

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Disclaimer

This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.