Banks in robust shape; fintech-NBFCs need watching

For many quarters now, banks have been reporting a consistent decline in non-performing assets (NPAs) and comfortable capital buffers, despite brisk loan offtake. This has given rise to doubts as to whether there’s an unseen bubble building up. There has also been concern about bank credit growth running well ahead of deposit growth. The Reserve Bank of India’s (RBI’s) latest Financial Stability Report for the six months ended March 31, 2024, seeks to allay these fears.

The report notes that banks are sitting on multi-year low gross non-performing assets (GNPAs) of 2.8 per cent and net NPAs of 0.6 per cent, with no signs of emerging stress in their SMA-1 and SMA-2 accounts (loans overdue for 30-60 days). It presents empirical data to show that credit-deposit ratios or defaults are not a big worry as long as credit growth stays within the 16-18 per cent range (it was 16 per cent in May 2024). It puts scheduled commercial banks (SCBs) through a battery of stress tests on macroeconomic shocks, a spike in defaults and so on, to find that they are in very little danger of falling short of capital or liquidity in high-stress scenarios. RBI’s pre-emptive measures in November 2023 to raise risk weights on unsecured retail loans seem to have worked by reducing banks’ CRAR (capital to risk-weighted assets) and thus moderating their lending to this segment.

Banks reported sequentially lower net and gross GNPAs of just 1.2 per cent and of 2.1 per cent on their retail books in March. With stock market investors relying on borrowed funds, there were concerns about whether a stock market crash would destabilise banks. But the stress test showing that a 55 per cent drop in stock prices would reduce banks’ CRAR only by 51 basis points, dismisses these fears. However, it must be remembered that it is not banks but non-banking finance companies (NBFCs) that have been at the forefront of lending to both new and below-prime borrowers of late. Data from the FSR suggests that risks could lurk there. Prompted by the regulatory tightening in November, NBFCs slowed their pace of retail lending and trimmed the share of unsecured loans in their books from 32.2 per cent to 22.9 per cent, while reporting NPAs below 2 per cent.

But RBI’s recent regulatory actions against some NBFCs, after inspecting their books, show that the reported numbers may hide evergreening and under-reporting of stress. While overall defaults on retail loans have dipped, those for loans below ₹50,000 remain elevated. Fintech-NBFCs account for 47 per cent of this pie. Over 8 per cent of personal loans also face defaults within a year, with more than half these borrowers having three live loans when taking the latest one. A blow-up in NPAs here could pose indirect risks to financial stability, as the NBFCs going big on these loans are borrowers from banks and significant net debtors to the financial system. RBI has its task cut out in trying to balance this risk with the need to push financial inclusion.