According to Fitch Ratings, continued high growth in unsecured retail loans could increase the risk of mispricing and misjudgment, which could have a direct impact on banks’ financial performance if operating conditions become less favorable.

Additionally, while increased regulatory focus on unsecured loans may slow their growth, this loan segment may still be a risk for banks like State Bank of India, ICICI Bank and Axis Bank, where unsecured personal loans and credit card loans are Make a big part. Mixture.

“Underwriting quality and risk control will remain important given banks’ growing interest in unsecured retail loans, where growth has significantly outpaced overall loan book growth,” Fitch said in a note. This is linked to their asset quality score and reflects their above-average risk appetite given their growth aspirations and increasing nonseasonal loan volumes.

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“The impact of legacy stress on asset quality is gradually diminishing, but rising growth and risk appetite in the currently benign credit cycle will test banks’ elevated risk appetite when operating conditions remain weak,” it said. Will adapt.”

On an overall basis, sectors such as non-banks, renewable energy, roads, steel and textiles have been the key growth areas, although the bulk of credit remains short-term.

Banks with risk profile in ‘BB’ category like State Bank of India, ICICI Bank and Axis Bank show slightly more diversified risk profile and better asset-quality performance compared to banks with ‘B’ category like Punjab National Bank, Union Bank. And Bank of India.

Banks with higher scores also have an advantage in selecting exposures due to their strong local franchises and brand recall. However, the lack of detailed information on the latest risks raised by the retail and SME sectors weighs on Fitch’s assessment.

• Also read: NBFCs report good loan growth but margin, credit quality concerns remain

credit enhancement

Credit growth remained strong across all banks in FY2013, with SBI, Bank of Baroda, Canara Bank, ICICI Bank and Axis Bank outperforming regional growth. While the growth and appetite for unsecured personal loans has increased rapidly, the share of personal loans remains quite low for most state banks.

“While retail risks are easier to manage due to high leverage, moderate domestic leverage and fast recovery, unsecured loans are inherently risky as banks have limited visibility into the end use of funds.”

• Also read: Bank credit growth moderates in second quarter, pace of deposit growth matches

Nevertheless, asset-quality scores for all rated banks are positive and their impaired-loan ratios are expected to improve further in FY24, it said, adding that the average impaired-loan ratio for the sector is expected to improve to 3.6 per cent. is estimated. per cent in Q1FY24, from 4.0 per cent in FY23.

Fitch revised the scores of several ‘B’ rated banks upward in 2023, noting better-than-expected performance, which is expected to continue in the near term.

It expects the loan-to-deposit ratio of banks to remain under pressure in the near future, with private banks feeling more affected. While expanding the deposit franchise is a management priority for almost all banks, it will be more so for private players given their ambitious growth plans.