Unsecured loans come back to haunt private banks after 13-year gap

ICICI Bank, Axis, among others see rise 'proforma' slippages in Q3

Banks are again facing stress in the unsecured loan segment, after a gap of 13 years. Most private banks that had grown their unsecured loans portfolios like credit card and personal loans aggressively in the last few years are now seeing repayment falling overdue in the October-December quarter. However, those loans have not been classified as non-performing asset (NPA) due to the Supreme Court order in September that directed banks not to classify loans as NPA, which were not declared as NPA as on August 31, till further orders.

Axis Bank – the third largest private sector has reported proforma slippages of Rs 6,740 crore, of which 84 per cent of proforma slippages are from the retail book, which is equally split between secured and unsecured.

Proforma slippages are those loans which would have slipped to the sub-standard category had it not been come under the standstill clause on asset classification.

“… the quarterly earnings performance was punctuated by expected rise in retail slippages,” Amitabh Chaudhury, MD & CEO of Axis Bank said in a call with the analysts on third quarter earnings. He though added that the slippages are expected to come down in the fourth quarter based.

Eighty-one per cent of Axis Bank’s Rs three trillion retail loans are secured. The Credit card and personal loan portfolio is 17 per cent of the retail loan book. Moreover, the bank’s unsecured portfolio is largely salaried, with personal loans are 100 per cent to salaried customers, so are 66 per cent of the credit card portfolio.

ICICI Bank, the second largest private sector lender, has seen Rs 7,340 crore of slippages (including the proforma kind) in the third quarter. While the bank said most of the slippages are from retail loans but declined to give a break up of secured and unsecured slippages.

“I think we have seen slippages across portfolios,” Rakesh Jha, chief financial officer told the analysts when asked about the break up of slippages between secured and unsecured loans. “I think during this quarter (Q3) we have seen the entire portfolio getting tested for payment because it has come out of moratorium,” he added.

ICICI Bank’s total retail portfolio is Rs 4.58 trillion of which credit cards are 3.8 per cent and personal loans are 10.1 per cent. Almost half the portfolio consists of mortgage loans.

“Most of the banks have highlighted in their earnings call about the stress in the unsecured portfolio. They said as a proportion of the overall incremental stress, the contribution of unsecured retail is high. These are mainly personal loans and unsecured small business loans,” said an analyst who wished not to be quoted.

Another private sector lender, IndusInd Bank, saw proforma slippages at Rs 2,510 crore – of which unsecured retail contributed 30 per cent while secured retail constituted 15 per cent. Indusind Bank’s credit card portfolio is only three per cent of its total loan book of Rs 88,482 crore.

Similarly, 40 per cent of Kotak Mahindra Bank’s incremental rise in pro-forma gross NPA between the second and third quarter of the current financial year was due to unsecured loans, which make up about 6 per cent of its total loans.

“Unsecured retail and bus operator segments are reflecting disproportionately higher stress,” ICICI Securities said in a note on the third quarter earnings of banks.

The stress in unsecured loans is back almost after 13 years, as the last time non-performing assets ballooned from personal loans and credit cards were during the global financial crisis of 2008. Since then banks had tightened their underwriting standard and armed with credit bureau scores, slippages from the unsecured loans were kept under check.

Banking analysts said the stress in the unsecured loan portfolio is due to income and job losses due to the Covid-19 pandemic.

“As a follow up to the pandemic, slippages were expected to go up. Unsecured loans are more vulnerable. These loans have no collateral, and a lot of these are from salaried customers,” said Nitin Aggarwal, analyst with broking firm Motilal Oswal.

“The slippages were not as much as expected. Still you have a certain degree of job losses and salary cuts. So, this has impacted the asset quality of personal loans and credit cards,” Aggarwal added.

The banking regulator probably saw this coming, as it red flagged the sharp growth of unsecured loans in December last year.

Observing the share of unsecured loans of both banks and non-banks has increased sharply over the last three years, RBI had said, “In recent years, SCBs [scheduled commercial banks] have been reorienting their loan book away from the industrial sector and towards retail loans in view of lower delinquency rates of the latter.”

“The growing share of unsecured credit card loans of SCBs – up from 3.1 per cent to 5.2 per cent within a span of five years – does not, however, augur well for their risk profile,” RBI had said in the Trend and Progress Report.

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