Mint street: Loan stress rose in H1FY20, says RBI

Stress in large accounts has been on the rise at both private and public sector banks in H1FY20, Reserve Bank of India (RBI) said on Tuesday even as it flagged increasing concentration risk and worsening asset quality in retail loans. The central bank observed credit growth has turned anaemic in 2019-20 while the overhang of NPAs remains high. Among sectors that remain stressed are power, NBFCs and real estate.

Data put out by RBI showed loans classified as SMA 1 by state-owned lenders, or loans overdue between 30 and 60 days, rose to 1.6% as a share of gross advances in September from 1.3% in March. The ratio for private sector banks rose to 1.9% in September from 1.8% in March.

Also SMA 2 accounts — or loans overdue between 60 and 90 days — rose to 2.2% in September from 0.7% in March for public sector banks. For private banks the ratio rose to 1.2% in September from 0.5% in March. SMAs are Special Mention Accounts and are classified by banks to red-flag risks and address them speedily.

The central bank said the retail loan space may be emerging as a new source of risk for lenders in an environment of subdued economic growth. Lenders have been moving away from large industrial loans towards retail loans as the non-performing assets (NPA) ratios of the latter have traditionally been low. However, RBI cautioned that the diversification strategy, while helpful as a risk mitigation tool, has its own limitations, pointing out the slowdown in consumption and overall economic growth may affect the demand for and the quality of retail loans.

The observations were made in the RBI’s report on trend and progress of banking for 2018-19.

After rising for seven years in a row, the gross non-performing asset (GNPA) ratio of banks declined in the financial year 2018-19.

This skew can only be fixed by reviving lending to industry. The central bank has flagged off this trend and said “the need of the hour is to kick-start industrial credit and use the impetus therefrom to regenerate a virtuous cycle of capex, investment and growth”. The banking regulator also said that it was necessary to keep in focus household leverage and indebtedness in the context of overall financial stability.