In Unusual Times, Some Interesting Trends In Credit 

In retail loans, credit cards were worst affected, with NPAs shooting to 3.5% in FY21.

In an earlier article, we had discussed the improvement in credit rating ratios (upgrade-downgrade ratios) of rating agencies. This was despite the economy going through stress, gross domestic product having de-grown by 7.3% in 2020-21 and the scenario being bolstered by various support measures such as moratorium on loans, one-time restructuring and National Company Law Tribunal (NCLT) action being kept in abeyance till March 2021. Since then, partial stress has emerged in an unusual quarter: retail loans, which have the best (i.e. lowest) default rate, and MSMEs (micro, small and medium enterprises).

Since the start of the asset quality review launched by the Reserve Bank of India (RBI) in 2015, followed by the Insolvency and Bankruptcy Code (IBC) in 2016, bad loans of banks went up in a jolt due to proper discovery. Since then, it has been coming down due to measures including write-offs, recoveries and settlements. In the current phase of the pandemic and economic weakness, this trend of improvement, or easing in non-performing assets (NPAs), continues in loans to industry.

Broadly, banks give four segments of loans: loans to industry, which have the highest incidence of NPAs; loans to agriculture with second-highest incidence of bad loans; loans to services and then to retail. In FY21, NPAs in industry as a sector improved palpably, and agriculture also showed marginal improvement.

However, loans to services and retail showed a mild deterioration. Let us scratch the surface.

Overall, in 2020-21, banks showed improvement in slippage ratio, which measures incremental NPAs. It declined to 2.5% in March 2021 from 3.8% in March 2020. While there was a decline in large NPA accounts with resolution of cases under IBC and lower slippages in the corporate segment, there was a relative increase in retail NPAs and services.

Within retail loans, all sub-segments such as housing loans, vehicle loans, credit card, and other retail loans showed slippages, with the most noticeable surge being in credit card loans. As mentioned initially, the stress is seen in retail loans and MSMEs. According to data from Care Ratings, taking retail and MSMEs together as a segment, for private sector banks, the gross NPA was 2.01% in June 2020, which moved up to 2.68% in March 2021 and further to 3.32% in June 2021.

For public sector banks (PSBs), taking retail and MSMEs together, gross NPA moved from 5.99% in June 2020 to 6.52% in March 2021 and further to 7.28% in June 2021.

The RBI allowed one-time restructuring for corporate, MSME and retail loans, which was open till 31 December 2020 (framework 1). This was partially extended for retail and MSME loans and is open till September 2021 (framework 2).

As per Care Ratings data, most restructuring has been done by PSBs: as on 30 June 2021, PSBs have restructured nearly ₹98,000 crore of advances, while private sector banks have restructured around ₹39,000 crore under both frameworks. The segment-wise breakdown of the data shows that in Resolution 1, corporates had the higher share of resolutions (57%), followed by personal loans (28%) and MSMEs (11%).

If we look at the combined break-up of restructured advances under both resolution frameworks, retail with MSME has the higher share (54%). What we derive from this discussion is that the rise in slippages and restructuring indicates stress build-up in the retail segment in a covid-impacted scenario. During the second wave, there was no blanket moratorium that was there earlier, from March to August 2020.

To recap the data on action by rating agencies, Crisil credit ratio, which measures upgrades to downgrades, went up to 1.33 in the second half of FY21. The number of upgrades was 294, against 221 downgrades. In FY21, Icra downgraded 14% of its rated universe and upgraded 8%.

Though the ratio was less than 1, it was still an improvement than earlier. Care Ratings publishes a metric called Debt Quality Index on a scale of 100 (base year FY12). This has improved marginally from 89.51 in March 2021 to 89.85 in July 2021. India Ratings (a subsidiary of Fitch) downgraded 199 issuers and upgraded 147 issuers in FY21. Here also, the ratio was less than 1, but was still an improvement than earlier.

Now, how do we reconcile the stress on retail with improvement in corporate ratings?

Corporates, broadly, have done a commendable job of reduction in debt and improvement of margins in stressful times. Retail loans, notwithstanding the stress, remain the lowest NPA segment for bank loans (approximately 2.5% in FY21) and industry, even after the improvement, remains most stressful (approximately 10% in FY21). In retail loans, the worst impacted is credit cards, with NPAs shooting up from 1.5% in FY20 to 3.5% in FY21. This is a message for people to be more temperate in usage of credit cards.


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