Personal loans: As bad debts spike, stocks of private banks slide

The stock prices of private banks that have reported an increase in bad loans in their personal loans and micro-credit businesses are bearing the brunt of investors' fears of a U-turn in the asset-quality cycle for the country's banks, reported Reuters.

RBL Bank's shares declined as much as 5.8 per cent on Monday after the lender reported a near 28 per cent sequential jump in quarterly slippages, or loans that were classified as non-performing for the first time.

Axis Bank, India's third-largest private bank, forecast retail asset quality would take a few more quarters to normalise. Its stock sank 4.5 per cent on Friday and dropped a further 1.1 per cent on Monday.

Kotak Mahindra Bank, however, gained 9 per cent after reporting lower slippages than the previous quarter, although it also warned that the stress in parts of its loan book would persist.

Rising bad loans

Indian banks are grappling with rising bad loans, particularly in sectors such as microfinance, credit cards and personal loans. Analysts have attributed this to over-leveraging and an increase in loans outstanding per borrower.

The rise in delinquencies has forced lenders to allocate more funds for potential losses and pare back loan growth in these segments, which, in turn, hurts profitability.

“The sign of stress that is visible across microfinance and unsecured loans is a mild symptom of a tougher macro environment,” said Kranthi Bathini, director of equity strategy at Wealthmills Securities.

“That is largely because banks are conservative towards loan growth, which coupled with tighter liquidity conditions, could mean that an economic recovery could be prolonged.”

RBL Bank -- over 50 per cent of whose slippages came from credit cards and microfinance loans -- should start seeing a normalisation in asset quality in the unsecured segment latest by July-September, CEO R Subramaniakumar said on a post-earnings call.

Kotak's gross non-performing assets ratio worsened slightly at the end of December and the lender said it would be cautious about unsecured loans going forward.

The stress “will take a couple of quarters to normalise,” starting only from April-June, CEO Ashok Vaswani said at a media conference on Saturday.

Banks' gross NPA (non-performing asset) ratio could rise to 3 percent by the end of March 2026, from a 12-year low of 2.6 per cent last September, the central bank said in its Financial Stability Report in December.