New Stress Pockets

Unsecured personal loans, credit cards, business banking, and MSME loans are emerging as new breeding ground for banks' NPAs. How serious is the problem?

In a large Mumbai-based private bank, collection and recovery targets for executives in the credit cards and personal loans division have doubled this year. The bank is using advanced data analytics and engaging with multiple new-age technology firms in risk management. It is analysing granular data of Covid-hit states for exposure in home or personal loans, nature of employment of borrowers (services or manufacturing), and impact on income post the Covid second wave.

The delinquency management strategy of the bank includes a “collection strategy” for loans under default between 90 and 180 days. The 180 days plus default accounts will straightaway move to recovery using legal remedies or selling to asset reconstruction companies (ARCs). “There is pressure on keeping delinquencies low by proactively reacting to stress cases by selling loans to ARCs or exploring other legal remedies,” says a market player aware of the bank's collection strategy. The bank knows this time round the government or the Reserve Bank of India (RBI) is not likely to be as sympathetic as it was last year.

In another private bank, the top management was vindicated when the Covid second wave started. The bank was selective in extending additional credit to weaker MSMEs under the emergency credit line guarantee scheme ( ECLGS). It set a tough criterion to approve requests for additional working capital loans under the scheme. “We looked at whether the MSME would survive Covid lockdown losses,” says the bank's senior management executive on condition of anonymity. The bank had given fewer loans compared to competitors. The public sector banks ( PSBs), which were quite liberal in accommodating MSMEs, are now staring at local lockdowns which would again hit small businesses. Any delayed economic recovery will pile up losses in a business segment that traditionally has high NPAs.

NPAs in Retail Portfolio

Clearly, banks’ pain points relate to unsecured personal loans, credit card outstanding, business banking and MSMEs which are the new breeding grounds for NPAs. It involves loans worth ` 28- 30 lakh crore accounting for 30 per cent of the total bank loan book. The RBI which had in January said that ‘India has bent the Covid-19 curve like Beckham’ has now got into action. In a video call early this month, multiple CEOs of PSBs explained the worst- case scenario in their loan portfolio to RBI’s top brass. Some CEOs sought extension of the one- time restructuring in view of the second wave of Covid. The RBI, however, was non- committal but reminded banks to conserve capital, devise ways to unlock capital and raise more capital where possible.

So, how serious is the problem? Global financial services firm, Macquarie Securities has predicted gross NPAs in the retail portfolio to double to 4 per cent. This assessment was done in December when Covid was on the decline and everyone was forecasting a V- shaped recovery. Macquarie then said the market should not be overly concerned about retail defaults, but the Covid second wave has thrown those forecasts out of the window.

The seven Covid- hit states are now estimated to account for nearly 45 per cent of banking loans. Some banks have started stress testing their loan portfolio for a possible third Covid wave. In a recent interaction with brokerage firm Emkay, Kaushik Mehta, Founder, and CEO, RULoans Distributions, one of the Direct Selling Agents for bank lenders, revealed banks are seeking DSA help to secure collections, which was almost negligible in January- March this year. “This indicates growing desperation in lenders. The risk of customers skipping payments or making part payments, too, is on the rise,” opines Mehta. Banks are now more exposed as loan moratorium and one- time restructuring benefits are no longer available to stressed borrowers. The banks have no option but press the recovery button.

In the last five years when corporate credit was sluggish, there was a rush towards high-margin retail segments like personal loans, microloans, consumer durables financing etc. Many experts suggest the whole game shifted to moving down the credit ladder. Some banks started giving loans to sub- prime customers. Currently, credit card portfolio stands at ` 1.16 lakh crore, while the

Unsecured & MSME Portfolio

` 28-30 lakh crore

Retail NPAs: 4%

Stressed retail loans, including MSMEs: 10-12%

most risky personal loans have an outstanding of ` 7.79 lakh crore. Consumer durable loans, a new segment for banks is at ` 7,242 crore. Within retail, the share of unsecured loans has been rising in the last five years. There is danger now since there is no collateral or sufficient assets to back these loan exposures. In many cases banks have not sought adequate collateral due to competitive reasons.

Anshuman Panwar, Co-founder, Creditas Solutions, which works on the retail side with banks and NBFCs, says there is definitely stress in the retail portfolio. “The average ticket size could be as low as ` 50,000 and the number of customer accounts would be huge,” says Panwar. In 2020/21, the banks’ maximum slippages, meaning fresh NPAs, have been coming from retail portfolio. Now, private banks have a higher share price of unsecured retail whereas PSBs have more stressed MSMEs in their portfolios.

“Unsecured retail saw slightly higher than expected slippages. However, this is a small part of the overall book,” defended Sumant Kathpalia, MD & CEO, IndusInd Bank, while interacting with investors in January. Around 10 per cent of the banks’ retail portfolio is in unsecured retail. Vishwavir Ahuja, MD & CEO, RBL Bank, recently informed that bulk of the slippages, around ` 1,300 crore out of ` 1,470 crore, were on account of retail businesses in the third quarter. ICICI Bank recently released the data which had proforma NPAs of ` 8,280 crore for the third quarter of FY2021. There was an increase of ` 6,870 crore in proforma NPAs compared to September 2020. A large part of proforma NPAs has come from the retail business.

SBI Credit Card & Payments, for example, has seen gross NPAs at 1.61 per cent, but if one looks at proforma NPAs, the figure shot up to 4.51 per cent in Q3 of FY2021. The banking industry is expecting stressed loans in credit cards to be around 10 per cent. But the banker defends it, saying credit cards by nature are unsecured products where high-interest rates are charged to cover likely losses. The problem could be on personal loans if the economic situation deteriorates. “The sheer intensity and scale of Covid has upset banks’ existing credit models. There is a complete discontinuity in data sets both on customer credit behaviour and macro fundamentals,” says Alok Tiwari, Co-founder & CEO, Cognext, a risk management advisory Fintech.

Fitch Ratings has recently stated that apart from retail loans, they consider micro, small, and medium enterprises to be most at risk. “There are also asset quality

“The government is trying to do the maximum it can do, but MSMEs with limited scale and lack of demand, do not have the ability to sustain”

Abizer Diwanji, Partner & National Leader (FSI), EY India