The banking sector is stable and well capitalised, the Economic Survey noted, even as it raised red flags about the rising share of unsecured loans in non-performing assets.

While gross non-performing assets (NPAs) of the the banking system hit a 12-year low of 2.6%, concerns are mounting over unsecured personal loans and credit card defaults, the Survey said. As of September 2024, 51.9% of new NPAs in retail loans originated from slippages in the unsecured loan book.

According to the Reserve Bank of India’s latest financial stability report, nearly half of the borrowers with credit cards and personal loans have another active retail loan, often substantial, in the form of a housing or vehicle loan.

“When a borrower defaults on any loan category, financial institutions classify all loans of that borrower as non-performing. So, their larger, secured loans face delinquency risks due to defaults in smaller personal loans,” the Survey said.

In response to rapid credit expansion, the RBI increased risk weights on unsecured retail loans by 25 basis points in November 2023, aiming to curb excessive lending. Despite that, the segment continues to grow, with housing loans remaining the largest contributor to credit expansion.

The credit growth, though still strong, has moderated in recent months due to a high base effect and regulatory tightening in sectors witnessing rapid growth. The Survey also points to a credit-deposit mismatch, where credit expansion outpaces the deposit growth.

In the current financial year, up to December 27, 2024, the growth rate in non-food credit has been 7.5%, compared with a growth of 11% in the year-ago period.  

“The moderation in the credit growth can be attributed to an increase in lending rates (as a result of monetary policy transmission of higher policy rates to higher lending rates) and the imposition of increased capital requirements for unsecured personal loans, credit cards and lending to non-banking financial companies (NBFCs) by the RBI from 100% to 125%,” noted the Survey.

There has been a consistent improvement in the profitability of scheduled commercial banks (SCBs) as reflected in the fall in gross NPAs, accompanied by a rise in the capital-to-risk weighted asset ratio (CRAR).

The GNPA ratio of SCBs has consistently declined from its peak in FY18 to a 12-year low of 2.6% at the end of September 2024. Lower slippages and a reduction in outstanding GNPAs through recoveries, upgradations, and write-offs have led to this decrease.

Lower GNPAs and higher provisions accumulated in recent years also contributed to a decline in net NPAs at around 0.6% at the end of September 2024. Improvements in asset quality parameters were observed across all major bank groups.

The growth in term deposits continues to outpace the current and savings account deposit growth. As of the end of November 2024, the YoY growth in aggregate deposits of SCBs stood at 11.1%. The growth in bank credit has started converging towards the deposit growth. At the end of November 2024, the growth in overall bank credit moderated to 11.8%, from 15.2% a year ago. The growth in overall bank credit up to December 27, 2024 in the current fiscal moderated to 7.7%.