Subprime defaults pinch Indian banks

Unbridled lending to subprime borrowers by banks in the past few years is now biting. The loan-loss ratio in loan portfolios in this segment has touched as high as 15 per cent in the case of some private sector banks.

Subprime borrowers belong to economically weaker sections with monthly income of around Rs 5,000 and pay interest rate as high as 45-50 per cent on loans ranging up to Rs 50,000.

Defaults in this segment have climbed up to double digits for banks and non-banking finance companies active in this market, which has become a cause of major concern among bankers. The rising defaults in the last six months or so are getting more magnified with the base (loan portfolios) remaining stagnant during this period.

In an investor conference about two months ago, ICICI Bank had said ".....if you look at for example, credit card, the credit losses have been running at about 8 per cent or so, personal loans in the region of 3.5 per cent to 4 per cent, and for small ticket personal loans, while it is lower currently, the loss will be in the region of about 15 per cent or so."

ICICI Bank's personal loans portfolio, including subprime loans, was about Rs 11,200 crore at the end of June 2007.

Default rates on retail loans, particularly unsecured loans, is on the rise. Within unsecured loans, defaults on subprime (small ticket size loans) are much higher though they vary from bank to bank.

"Non-performing assets in personal loans portfolios of banks have increased to about 5 per cent now from 3 per cent last year and on credit cards to around 11 per cent from high single digits,'' a senior official with a private sector bank, who did not want to be quoted, said.

The loan defaults in the subprime segment have increased beyond banks' tolerance limits. Considering the high interest rates charged on small ticket loans, banks would be comfortable with maximum defaults of 9-10 per cent in the portfolios, the head of recovery of a bank active in this segment said.

However, the size of subprime loans provided by banks and NBFCs was not available, with none of the lenders providing any breakup of such loans. Banks are also witnessing a sharp rise in defaults in their motorcycle loans portfolios, where the average loan size is less than Rs 50,000.

HDFC Bank too is present in the business of providing small ticket loans, but details on the level of defaults were not available. HDFC Bank has always maintained that its "retail NPAs are in line with the product mix."

"The default rate is always higher in unsecured lending, hence, we charge a higher rate of interest. Banks factor in a little higher loss in this segment, which is called the tolerance level. We are seeing a slowdown in the retail growth. If the denominator is not growing and the non-performing loans are on a rise, then bank is in for some trouble,'' said an official of another private sector bank, who also did not want to be named. The rise in defaults to intolerable levels had also seen banks getting very aggressive with their recoveries, which led to some instances of deaths allegedly due to excesses by recovery agents. ICICI Bank had to pay Rs 15.50 lakhs in the form of fixed deposit and insurance covers to the family members of a borrower in Mumbai, who committed suicide leaving behind a note implicating recovery agents.

Bankers said such incidents have happened only in the case of borrowers from the weaker sections as this class of defaulters are easy targets for forcible recoveries.