Is the Bad Loan Problem Shifting to Individuals from Industries?

Sub: Economy

Sec: Monetary Policy

Though Indian banks are in the pink of health, the RBI is worried about slippages and delinquencies.

Historical Context:
- Until the mid-2010s, banks primarily lent massive loans to big industries.
- Failures in these businesses resulted in significant bad loans that were initially hidden.
- In 2015, the RBI carried out a review, uncovering these hidden bad loans.
- The share of bad loans reached as high as 10% in 2017, indicating that nearly one in every 10 loans had turned bad.
Recovery Measures:
- Various debt recovery channels, including the Insolvency and Bankruptcy Code, 2016, were employed.
- Banks managed to recover more bad loans, improving their financial health.
- As a result, Gross Non-Performing Assets (GNPA) reached a decadal low of 2.8%, and Net Non-Performing Assets (NNPA) was 0.6% in March 2024
Shift to Retail Loans:
- Reducing loans to industries meant banks had to look elsewhere to lend and earn.
- The mid-2010s saw an increase in loans to the retail sector, including personal loans, credit card receivables, and housing loans.
- Proliferation of instant loan apps enticed consumers, leading to a debt trap.
- The share of retail loans grew significantly, surpassing loans to industries and services.
Current GNPA Trends:
- The GNPA ratio of personal loans has been reducing consistently, reaching 1.2% in March 2024 — the lowest across sectors
RBI’s Concerns:

Despite a generally positive outlook, the RBI has highlighted two signs of incipient stress:

Slippages: Fresh additions of bad loans in a year.
- In FY24, slippages from retail loans (excluding home loans) formed 40% of fresh additions of NPAs
Delinquency Levels: Persistent delinquency can eventually turn an account into an NPA.
- Delinquency levels among small borrowers with personal loans below ₹50,000 remain high.
- Most of these loans were sanctioned by NBFC-Fintech lenders, major drivers behind digital lending apps.
- High delinquency levels persist in small finance banks and NBFC-Fintechs
Future Outlook:
- While the banking system appears mostly disease-free, the RBI is worried about the symptoms of slippages and delinquencies.
- This time, the focus of concern has shifted from industries to individuals.

Summary:

GNPA and NNPA trends from March 2015 to March 2024, showing a decadal low in March 2024.
GNPA ratio by sector, with personal loans having the lowest ratio at 1.2% in March 2024.
Bank-type wise split of slippages from retail loans in new NPAs, with retail loan slippages forming 40% of new NPAs in FY24.
Delinquency levels for personal loans below ₹50,000, highlighting persistent high levels in small finance banks and NBFC-Fintechs.