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The bad assets or gross <keyword id="19964545" type="General" weightage="20" keywordseo="NPAs" source="keywords">NPAs</keyword> of commercial <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> fell to a 12-year low of 2.8% in March 2024 and may go down further to 2.5% by the end of the current fiscal, said the <keyword id="19899808" type="General" weightage="100" keywordseo="RBI" source="keywords" meta.keywordsubtype="org" meta.entityname="RBI" meta.hostid="269" meta.entityid="RBI">RBI</keyword>'s <keyword id="678734" type="General" weightage="20" keywordseo="Financial-Stability-Report" source="Orion">Financial Stability Report</keyword> (FSR) released on Thursday. <keyword id="19982351" type="General" weightage="20" keywordseo="Scheduled-Commercial-Banks" source="keywords" meta.keywordsubtype="org" meta.entityname="Scheduled Commercial Banks" meta.hostid="269" meta.entityid="Scheduled Commercial Banks">Scheduled Commercial Banks</keyword>' (SCBs) gross <keyword id="6401657" type="General" weightage="20" keywordseo="non-performing-assets" source="Orion">non-performing assets</keyword> (<keyword id="19982350" type="General" weightage="20" keywordseo="GNPA" source="keywords">GNPA</keyword>) ratio fell to 2.8%, and the net non-performing assets (NNPA) ratio to 0.6% at the end of March 2024. "The asset quality of SCBs recorded sustained improvement, and their GNPA ratio moderated to a 12-year low in March 2024. Their NNPA ratio too improved to a record low," said the June FSR. Among bank groups, public sector banks (<keyword id="20012926" type="General" weightage="20" keywordseo="PSBs" source="keywords">PSBs</keyword>) recorded a substantial reduction (76 bps) in their GNPA ratio during H2 2023-24. While the GNPA stock decreased across all bank groups, active and deep provisioning by PSBs and foreign banks (FBs) resulted in an improved provisioning coverage ratio (PCR) in March 2024, the report said. The half-yearly slippage ratio (viz, new NPA accretions as a share of standard advances) decreased across bank groups. Though the amount of write-offs declined during the year, the write-off ratio remained almost at the same level a year ago due to a reduction in GNPA stock, the FSR said. Overall, it added the sustained reduction in the GNPA ratio since March 2020 has been primarily due to a persistent fall in new NPA accretions and increased write-offs. The RBI said macro stress tests are performed to assess the resilience of SCBs' balance sheets to unforeseen shocks emanating from the macroeconomic environment. These tests attempt to assess capital ratios over a one-year horizon under a baseline and two adverse (medium and severe) scenarios. "The GNPA ratio of all SCBs may improve to 2.5% by March 2025 under the baseline scenario," the report said. However, if the macroeconomic environment worsens to a severe stress scenario, the ratio may rise to 3.4%. Under the severe stress scenario, the GNPA ratios of PSBs may increase from 3.7% in March 2024 to 4.1% in March 2025, whereas it may go up from 1.8% to 2.8% for private sector banks and from 1.2% to 1.3% for FBs. The <keyword id="20089808" type="General" weightage="20" keywordseo="financial-stability" source="keywords">Financial Stability</keyword> Report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and risks to financial stability. The report further said deposit mobilisation by SCBs gathered pace during 2023-24, with a large portion of new accretions in the form of term deposits. "Interest rates became more attractive as banks stepped up efforts to mobilise funds to match the rapid rise in credit demand. Growth in current account and savings account (CASA) accelerated across all bank groups," the RBI said. According to the report, bank credit accelerated during H2 2023-24 among public sector banks (PSBs) and foreign banks (FBs), whereas it moderated in respect of private sector banks (PVBs). The share of credit to the services sector and personal loans in the aggregate loan portfolio increased. Personal loans accounted for over half of PVBs' <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword>. The expansion in personal loans was broad-based, led by housing loans and followed by other personal loans.

Banks' gross NPAs at 12-yr low, may fall further to 2.5%: RBI report

<ul><li>Incremental credit growth expected to remain robust at Rs. 16.5-18.0 trillion in FY2024, despite marginal slowdown.</li><li>NIMs expected to compress by 20-25 bps, though benign credit costs and lower operating expenses to provide support.</li><li>Asset quality is likely to remain benign as GNPAs and NNPAs are expected to decline further by March 2024.</li></ul> Analysts may be worried about rising stress in the retail assets of banks, but <keyword id="6354972" type="General" weightage="100" keywordseo="icra" source="Orion">ICRA</keyword> is of the view that the sector is resilient and that credit growth is expected to remain strong. Given that deposits have been repriced after the <keyword id="6375120" type="General" weightage="50" keywordseo="monetary-policy-committee" source="Orion">Monetary Policy Committee</keyword> of the <keyword id="6354335" type="General" weightage="50" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword> delivered six interest rates hikes. However, ICRA does not expect this to impact profitability of the sector negatively. In a note, the agency said: “While the upward repricing of the deposit base is likely to lead to a moderation in the interest margin, benign asset quality pressures would support lower credit costs and earnings.” Accordingly, in ICRA’s view, the banking sector is expected to continue generating sufficient internal capital to largely meet its growth needs while improving the capital cushions. The retail segment is likely to remain the key contributor to credit growth although the sustainability of asset quality hinges on macroeconomic conditions remaining favourable. ICRA expects the headline metrics of the banking sector to remain on an improving trajectory on the back of controlled net additions (net of recoveries and upgrades) to non-performing advances (NPAs) and reasonably strong credit growth. Accordingly, ICRA expects the gross NPAs (GNPAs) and net NPAs (NNPAs) to decline to 2.8-3.0% and 0.8-0.9%, respectively, by March 2024 from 3.96% and 0.97%, respectively, as on March 31, 2023, which would remain the best in more than a decade. Notwithstanding this, ICRA remains cautious about the impact of macroeconomic shocks on asset quality, if these were to materialise. Commenting further Anil Gupta, Senior Vice President &amp; Co-Group Head, ICRA said: “Credit growth remains robust despite some moderation. Even at the anticipated pace of growth for FY2024, incremental credit expansion would be the second highest ever at Rs 16.5-18.0 trillion, next only to the record level of Rs 18.2 trillion (+15.4%) last year.” Credit costs are estimated to remain at 1.0% of advances in FY2024, in line with FY2023. This should allow banks to comfortably withstand a compression of 20-25 bps in the interest margins, which would lead to a mild moderation in the return on assets (RoA) to 1.0% in FY2024 from 1.1% in FY2023. At these levels, the RoE would remain healthy at 13.0-13.1% in FY2024 against 13.8% in FY2023. Furthermore, supported by internal capital generation and lower <keyword id="4105639" type="General" weightage="20" keywordseo="NNPA" source="Orion">NNPA</keyword> levels, the capitalisation and solvency profiles of private and public sector banks would remain comfortable. ICRA projects the Tier-I capital of the banking sector at 14.6-14.7% (14.4% as of March 2023) and an improvement in the solvency levels to 7% (8% as of March 2023) by March 2024. Over the last decade, credit growth in the retail segment remained buoyant and a key driver of overall credit expansion. As retail growth outpaced other segments, its share in bank credit rose to 32% as on March 31, 2023 from 18% in March 2013. Moreover, the corporate book witnessed underperformance in recent years, including weaker asset quality levels and muted expansion, resulting in slower growth trends relative to the retail segment. The Covid-19 pandemic was a stress test event on the asset quality across segments and defaults and losses were relatively higher in the unsecured segments. With more insight on the borrowers’ repayment behaviour during the pandemic, lenders can take better decisions while growing unsecured retail loans. Moreover, the retail segment continued to report resilience despite volatile macro-economic conditions, including rising interest rates and surging inflation, which impacted disposable income. Gupta added: “Even as the retail segment has performed well, the material weakening of macro-economic conditions could exert pressure on the debt-servicing abilities of borrowers and we remain watchful of its impact on the asset quality of lenders. Nonetheless, banks have strong operating profits and capital positions. Consequently, they are much better placed at present for navigating through such a scenario.”

Interest rate hikes unlikely to have negative impact on earnings of banking sector: ICRA

Even though the gross non-performing assets (<keyword id="710979" type="General" weightage="80" keywordseo="gnpa" source="Orion">GNPA</keyword>) of scheduled commercial banks in <keyword id="3658" type="General" weightage="20" keywordseo="india" source="Orion">India</keyword> has hit a six year low of 5.9 per cent in FY22, it can improve further, said <keyword id="6431877" type="General" weightage="100" keywordseo="care-ratings" source="Orion">CARE Ratings</keyword> in a report. According to the credit rating agency, the GNPA of Indian banks at the end of FY22 was at 5.9 per cent and the overall provision coverage ratio (PCR) went up to 70.9 per cent. "As the Indian economy has navigated the pandemic-induced shocks, the <keyword id="6355272" type="General" weightage="20" keywordseo="bank" source="Orion">bank</keyword> credit growth by scheduled commercial banks (SCBs) improved post-August 2021 to reach 13.1 per cent in early June 2022, a rate last recorded in March 2019," the report said. Apart from retail, the major driver of this growth has been the wholesale credit, which reported double digit growth after witnessing a significant slowdown last year. According to CARE Ratings, the <keyword id="6354335" type="General" weightage="50" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword>'s (<keyword id="30067" type="General" weightage="50" keywordseo="rbi" source="Orion">RBI</keyword>) <keyword id="678734" type="General" weightage="50" keywordseo="financial-stability-report" source="Orion">Financial Stability Report</keyword> released on June 30 presents a rather satisfactory picture of the Indian banking system and the GNPA ratio is one of the most important indicators to check the health of the banking system. The GNPA ratio of SCBs had been on a downward trajectory since March 2019, owing to recoveries and higher write-offs by multiple banks and one time restructuring (OTR) scheme announced by RBI. As per the stress tests conducted by RBI, the SCBs GNPA ratio could improve from 5.9 per cent in March 2022 to 5.3 per cent by March 2023 under the baseline scenario driven by higher bank credit growth and a declining trend in the stock of GNPAs. "However, the GNPA ratio may rise under the medium/severe stress scenarios, the GNPA ratio may rise to 6.2 per cent/ 8.3 per cent, respectively," CARE Ratings said. SEE ALSO : <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/stock-market/news/adani-enterprises-adani-ports-and-adani-total-gas-are-going-ex-dividend-on-july-14-should-you-buy-them/articleshow/92823532.cms">These three Adani stocks are going ex-dividend on July 14 – should you buy them?</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/careers/news/after-techies-its-aviation-crew-salaries-thatll-be-up-in-the-air/articleshow/92818738.cms">After techies, its aviation crew salaries that’ll be ‘up in the air’</a>

Banks' non performing assets hit a six year low, says CARE Ratings

Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of microfinance and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, <keyword id="46717" type="General" weightage="20" keywordseo="IndusInd-bank" source="Orion">IndusInd Bank</keyword> set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e., an <keyword id="79363" type="General" weightage="20" keywordseo="npa" source="Orion">NPA</keyword>, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals, i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, <keyword id="30067" type="General" weightage="20" keywordseo="RBI" source="Orion">RBI</keyword>, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv, from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending installments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honor any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its <keyword id="763994" type="General" weightage="20" keywordseo="Gross-NPA" source="Orion">gross NPA</keyword> for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. <keyword id="62152" type="General" weightage="20" keywordseo="IDFC-bank" source="Orion">IDFC Bank</keyword>’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in unsecured loans, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. Kotak Mahindra Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical Bollywood headmaster who runs his dominion with an iron fist and takes things (and ceiling rates) into their own hands. However, that's a story for another day.

Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

<div type="image" title="The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books." agency="ANI" msid="114778648" hostid="261" caption="&amp;lt;p&amp;gt;The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books.&amp;lt;/p&amp;gt;"></div> Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of <keyword id="113684" type="General" weightage="20" keywordseo="microfinance" source="Orion">microfinance</keyword> and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, IndusInd Bank set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e. an NPA, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, RBI, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and <keyword id="20117932" type="General" weightage="20" keywordseo="navi-finserv" source="keywords">Navi Finserv</keyword> from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending instalments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honour any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its gross NPA for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. IDFC Bank’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in <keyword id="6051027" type="General" weightage="20" keywordseo="Unsecured-loan" source="Orion">unsecured loan</keyword>s, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. <keyword id="6376194" type="General" weightage="20" keywordseo="kotak-mahindra" source="Orion">Kotak Mahindra</keyword> Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical <keyword id="19897820" type="General" weightage="20" keywordseo="bollywood" source="keywords">Bollywood</keyword> headmaster who runs his dominion with an iron fist. However, that's a story for another day. Do you have a topic in mind you'd want a simpler explanation for, or insights or personal experience to share on personal finance and more? Contact us at businessinsider@timesinternet.in.

Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

The Reserve Bank on Wednesday asked non-bank finance companies to broad-base their <keyword id="60356" type="General" weightage="20" keywordseo="fundraising" source="Orion">fundraising</keyword> to limit reliance on <keyword id="6368751" type="General" weightage="20" keywordseo="banks" source="Orion">banks</keyword> as it called for strengthening balance sheets and guarding against frauds and data breaches. According to the report 'Trend and Progress of Banking in India 2022-23' released by the <keyword id="30067" type="General" weightage="20" keywordseo="rbi" source="Orion">RBI</keyword>, the <keyword id="183986" type="General" weightage="20" keywordseo="indian-banking-system" source="Orion">Indian banking system</keyword> and <keyword id="6354598" type="General" weightage="20" keywordseo="nbfcs" source="Orion">NBFCs</keyword> remain sound and resilient, backed by high capital ratios, strengthening asset quality and robust earnings growth. The consolidated balance sheet of scheduled commercial banks (SCBs) in 2022-23 expanded by 12.2 per cent, driven by credit to retail and services sectors. Deposit growth also picked up, although it trailed credit growth, it said. Looking ahead, it said, "Given the increasing interconnectedness between banks and NBFCs, the latter should focus on broadbasing their funding sources and reduce overdependence on bank funding. Banks and non-banks both, need to bring in greater empathy in their customer services". The concerted efforts are needed by all stakeholders to protect the banking and payments system from the risks of fraud and data breaches emanating from cyber threats, the report added. "Overall, banks and NBFCs need to further strengthen their balance sheets through robust governance and risk management practices to meet the growing aspirations of the Indian economy," it said. As per the report, the improvement in asset quality of banks that began in 2018-19 continued during 2022-23, and even in the first half (April-September) of 2023-24, the gross non-performing assets (GNPA) ratio stood at 3.2 per cent. Higher net interest income and lower provisioning boosted net interest margin (NIM) and profitability in 2022-23, it said.

RBI asks NBFCs to broad-base fundraising, reduce dependence on banks

<ul><li>The on-book portfolio stood at ₹12.7 lakh crore at the end of June 2022, up from ₹11 lakh crore in the previous year.</li><li>The high growth in Q1 was due to moderate growth in the same period last year, <keyword id="6354972" type="General" weightage="100" keywordseo="icra" source="Orion">ICRA</keyword> said.</li><li>The ratings agency pegs the full-year portfolio growth between 10-12%.</li><li>ICRA also said that asset quality also witnessed an improvement during Q1 FY23.</li></ul><keyword id="100080" type="General" weightage="20" keywordseo="Housing-finance" source="Orion">Housing finance</keyword> companies have clocked a 15% year-on-year growth in their on-book portfolio in Q1 FY23, according to credit rating agency ICRA. However, the high growth in Q1 was due to moderate growth in the same period last year, the ratings agency said. Overall, housing finance companies’ on-book portfolio stood at ₹12.7 lakh crore at the end of June 2022, up from ₹11 lakh crore a year ago. “The growth was driven by the healthy demand in the industry and the increasing level of economic activity. Going forward, demand is expected to remain firm,” said Sachin Sachdeva, VP and sector head - financial sector ratings, ICRA, while retaining growth and asset quality estimates for FY23. However, the boost from the low base effect in Q1, combined with the rising interest rates, could result in a slightly lower pace of growth in FY23 than Q1 – the ratings agency pegs the full-year growth between 10-12%. According to a Livemint <a href="https://www.livemint.com/market/mark-to-market/icing-on-banking-cake-may-start-melting-soon-11666806180336.html">report</a>, the weighted average increase in interest rates on fresh rupee loans from banks between April and August 2022 stood at 82 bps. The RBI has <a href="https://www.businessinsider.in/finance/news/rbi-hikes-repo-rate-by-50-bps-taking-it-to-a-three-year-high-of-5-9-das-says-inflation-at-alarmingly-high-levels/articleshow/94550429.cms">increased</a> the repo rate by 190 bps so far this year in an effort to tackle rising inflation, which stood at 7.41% in September. Following the rate hikes, the current repo rate stands at 5.9%. <cmsannotation type="cmsannotation" annotationid="Asset quality improvements to continue" comment="subhead" text="Asset quality improvements to continue">Asset quality improvements to continue</cmsannotation> Housing finance companies (HFCs) have seen a moderate improvement in their asset quality during Q1 FY23. The gross non-performing assets (GNPA) ratio declined to 3.1% as of end June 2022, from 3.2% at the end of March 2022, according to the agency. The report adds that this improvement was due to two reasons – an increase in the on-book portfolio, and recovery in the non-housing segment of some large HFCs, allowing them to buck the trend of increasing GNPAs in the first quarter of a financial year. The growth in the June quarter also helped HFCs reduce their standard restructured book to 1.3% of assets under management (AUM) in end June 2022, from 1.7% in end March. Restructured standard book refers to those loans which have been restructured by a modification of the credit terms while maintaining the “standard asset” tag. “The improvement in GNPAs in Q1 FY2023 was driven by improvement in GNPAs of some large HFCs and it was not broad based. Nevertheless, ICRA expects further improvement in FY2023 and retains its GNPA estimate of 2.7-3% by March 31, 2023,” Sachdeva added. SEE ALSO: <a href="https://www.businessinsider.in/finance/news/this-is-indias-decade-and-gdp-is-likely-to-cross-7-5-trillion-by-2031-says-morgan-stanley/articleshow/95256483.cms">This is India’s decade and GDP is likely to cross $7.5 trillion by 2031, says Morgan Stanley</a> <a href="https://www.businessinsider.in/stock-market/news/indian-markets-trade-flat-despite-us-feds-75-bps-rate-hike/articleshow/95269969.cms">Indian markets trade flat despite US Fed’s 75-bps rate hike</a> <a href="https://www.businessinsider.in/entertainment/news/shark-tank-season-2-is-here-but-popular-shark-ashneer-grover-is-missing-meet-the-new-shark/slidelist/95271549.cms">Shark Tank season 2 is here but popular shark Ashneer Grover is missing – meet the new shark</a>

Housing finance companies clock 15% YoY portfolio growth in Q1, but rate hikes could moderate growth for FY23, says ICRA

<ul><li>The number of <keyword id="6358354" type="General" weightage="100" keywordseo="msme" source="Orion">MSME</keyword>s have gone down in 2021-22 compared to 2020-21 because a number of MSMEs have grown bigger and crossed the MSME threshold. </li><li>MSMEs across all sectors have shown strong resilience to bounce back post the pandemic-induced slowdown. </li><li>The <keyword id="4656676" type="General" weightage="80" keywordseo="udyam" source="Orion">Udyam</keyword> portal and the Emergency Credit Line Guarantee Scheme have helped MSMEs to weather the storm. </li></ul>The micro, small and medium enterprises (MSME) sector is charting a new story post pandemic, with credit growth to MSMEs consistently higher – both on a year-on-year basis and also in comparison with larger industries, according to SBI Research. Incentives provided by the Emergency Credit Line Guarantee Scheme (ECLGS), coupled with lower gross non-performing asset (GNPA) ratios have helped in boosting credit to MSMEs, the SBI Research report said. Interestingly, the number of MSMEs have gone down in 2021-22 compared to 2020-21 because a number of MSME units have grown bigger and crossed the ₹250 crore turnover threshold that defines an MSME unit under the new definition, enforced in 2020. A company bigger than ₹250 crore is considered a mid-sized corporate firm. MSMEs have shown strong resilience to bounce back from the pandemic- induced slowdown seen in 2020. In some sectors that were not affected by the pandemic – like hospitality, construction, NBFCs, power, metals and so on, the credit outstanding as of March 2022 was almost 3x that seen in March 2018. There were sectors that were affected but have recovered from the pandemic – like edible oil, printing, consumer durables, pharmaceuticals, jute, aviation, etc, – with credit expansion for some of these in March 2021 lower than the March 2018 levels, but these have staged a smart recovery in March 2022, the report said. Some industries like mining, petrochemicals, cement, FMCG and others were deeply impacted by the pandemic but have almost recovered. A couple of initiatives from the Government of India may have helped MSMEs weather the storm and chart a strong growth story, according to SBI Research. Udyam portal: Turning informal micro enterprises formal In July 2020, the Government of India launched <keyword id="15931646" type="General" weightage="50" keywordseo="udyam-assist-platform" source="Orion">Udyam Assist Platform</keyword> (UAP) to bring all the Informal Micro Enterprises (IMEs) – which constitute around 99% of the MSMEs in the country – into the formal ambit without complex and complicated paperwork. The UAP will enable IMEs who aren’t registered under GST to get a registration certificate based on information with Banks/NBFCs. The Udyam registration may also help MSMEs in availing the benefits of multiple schemes of the <keyword id="5713874" type="General" weightage="50" keywordseo="ministry-of-msmes" source="Orion">ministry of MSMEs</keyword> such as Credit Guarantee Scheme, Public Procurement Policy, additional edge in government tenders and protection against delayed payments by corporates, etc. The IMEs will also become eligible for priority-sector lending by banks, be able to get collateral-free loans from banks and also be able to get licences, approvals and registrations easily. ECLGS: A saviour during pandemic The ECLG scheme acted as an enabler and helped MSMEs navigate the pandemic better. While at least 14.6 lakh MSMEs accounts were saved due to the ECLG scheme in absolute terms, MSME loan accounts worth ₹2.2 lakh crore improved since the inception of the ECLG scheme for the entire banking industry, as per SBI Research. This means that around 12% of the outstanding MSME credit has been saved from slipping into non-performing assets (NPAs) because of the ECLG scheme. Of the 14.6 lakh MSMEs accounts that were saved due to the ECLG scheme, almost 93.8% were in the <keyword id="16232960" type="General" weightage="50" keywordseo="micro-and-small" source="Orion">Micro and Small</keyword> category. If such units slipped into NPA, 1.65 crore workers would have become unemployed.

You Searched For "GNPA" and got 8 results

Banks' gross NPAs at 12-yr low, may fall further to 2.5%: RBI report

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Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

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Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

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RBI asks NBFCs to broad-base fundraising, reduce dependence on banks

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Housing finance companies clock 15% YoY portfolio growth in Q1, but rate hikes could moderate growth for FY23, says ICRA

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