2023-06-29 18:23:30
India’s bad loans may be at a decadal low, but nearly 10% of retail borrowers are missing monthly payments, the Reserve Bank of India has flagged in its latest financial stability report. These borrowers manage to keep their accounts from slipping into non-performing assets (NPAs) with some payments before the 90-day deadline.
Moreover, an inflation print higher than the mandated band of 2-6% puts household debt portfolio of many retail borrowers at risk, the central bank said.
It, however, assured that these signs of potential stress in retail loans do not pose an imminent risk to systemic stability of the banking sector.
“Although the gross non-performing ratio of retail loans at the system level was low at 1.4% as of March 2023, the share of ‘special mention accounts’ was relatively high at 7.4% for scheduled commercial banks (SCBs) and it accounted for a tenth of their retail assets portfolio,” RBI’s latest financial stability report said.
Stress in a loan account is identified by creating three sub-categories under the special mention account (SMA) category. An account is categories as, SMA-0 if the principal or interest payment is delayed but not overdue for more than 30 days, SMA-1 if the principal or interest payment is overdue between 31 and 60 days, and SMA-3 if the principal or interest payment is overdue between 61 and 90 days. If a loan account is overdue for 90 days or more, then it is classified as NPA.
The central bank’s observation assumes significance because of the runaway growth in retail loans portfolio of commercial banks in the country, accounting for the largest share as category at 32% of total bank loans as of March 2023, up from 25% five years ago in March 2018.Retail loans grew at a compounded annual rate of 24.8% between March 2021 and March 2023, almost double the pace of gross advances that grew 13.8% a year during the same period.Another concern is that growth of unsecured loans has outpaced that of secured loans.
A sensitivity analysis by the central bank’s researchers showed that there is a likelihood of a 9 percentage points increase in the number of loans at risk and a 8 percentage points rise in debt at risk under various scenarios of inflation exceeding the mandated band of 2-6%.
Besides the central bank researchers’ analysis also points to potential stress on household balance sheets. “Households with EMI-to-income ratio of more than 60% are more at risk of a negative financial margin,” the report said. A household’s financial margin is defined as income net of estimated taxes, EMI (equated monthly instalment) on housing loan, and expenditure on basic necessities.
Inflation has been on an upward trend since December 2018, peaking at 7.3% in the June 2022 quarter. Although inflation has been easing of late, it still remains above the 4% target and is projected to be over 5% in 2023-24.
High inflation increases the expenditure on basic necessities, and the ensuing tightening monetary policy cycle increases the EMI, producing a significant impact on the financial margins of households.
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