UBS Securities flags concerns about retail loan risks, predicts sharp surge in credit losses

In the wake of the Reserve Bank of India's (RBI) recent warning to banks regarding the exponential growth of their retail loan portfolios, foreign brokerage firm UBS Securities has sounded the alarm about escalating default risks in unsecured retail loans offered by banks. The Swiss brokerage anticipates that these mounting default risks could potentially elevate credit losses by a range of 50 to 200 basis points (bps).

On October 8, the RBI issued a stern caution to banking institutions regarding the proliferation of unsecured retail loans on their balance sheets. Banks have long leaned on their retail loan portfolios, as the corporate sector's borrowing demand has remained lacklustre.

Over the past three years, retail loans have consistently accounted for over 30 per cent of the overall loan portfolio within the banking system, while other types of loans have lagged significantly behind, according to data from the central bank.

"We observe a growing threat of defaults in the domain of unsecured retail loans offered by banks, which is likely to drive up their credit losses by 50-200 basis points. We believe there is a considerable risk of more stringent regulatory measures," UBS Securities cautioned in a note released over the weekend.

As a result of these concerns, the brokerage has decided to take a neutral stance on the Indian banking sector and has downgraded State Bank, Kotak Bank, and Axis Bank with a "sell" recommendation, as indicated in their note.

According to analysts at UBS Securities, it is customary for rapid loan growth to be accompanied by an increase in default rates. Furthermore, the issuance of new personal loans to individuals with weaker credit profiles, which constitutes as much as 22 per cent of total disbursements, exposes this segment to the potential pitfalls of an economic downturn.

Non-Banking Financial Companies (NBFCs) and state-run banks have a higher proportion of borrowers with suboptimal credit profiles compared to large private banks.

The proportion of unsecured loans relative to total loans has risen to 11.1 per cent for SBI, 12.8 per cent for ICICI Bank, and 10.7 per cent for Axis Bank. However, this figure decreased to 11.9 per cent for HDFC Bank following its merger with the patent in July 2023.

(With PTI Inputs)