MSME defaults rise can worry banks
The banking sector’s bad loans are steadily declining, but analysts are sensing early signs of trouble from the retail and MSME sectors. If last month, none other than the RBI flagged concerns over 7% of retail borrowers missing monthly payments in its bi-annual Financial Stability Report, a joint Assocham-Crisil study in May warned of MSME sector bad loans likely touching double digits by FY24. The reports, however, reason that either sector’s anticipated stress was unlikely to cause an imminent risk at any individual bank level or to the systemic stability of the banking sector. That’s a relief. Still, banks and the regulator shouldn’t look the other way given the unstoppable pace at which MSME credit and, in particular, retail loans have been growing.
Although the gross NPAs of retail loans stood low at 1.4% of total advances in March 2023, the share of ‘special mention accounts’ (loans that are just inches away from turning bad) was relatively high at 7.4% and accounted for a tenth of banks’ retail assets portfolio, according to the RBI. These may not be alarming levels, but it’s only appropriate to pay close attention to the breakneck speed with which households’ credit growth is rising. Credit cards seem to lack all limits, with the latest data showing spending at an all-time high of Rs 1.4 lakh crore in May. Lenders must be vigilant before the ‘quick to borrow, never to pay’ trend sets in. The growth in unsecured loans has surpassed secured loans already, and high inflation and interest rates could affect borrowers’ ability to repay amid the potential stress on household balance sheets, as the RBI had pointed out.
Likewise, the MSME sector has witnessed a healthy double-digit growth for some time. As bankers acknowledge, some bad loans are inevitable when the industry clocks 18–20% annual growth rates. Banks barely managed to anchor MSME NPAs below 10% last fiscal, thanks to write-offs and one-off resolution schemes, and the current fiscal could have been better, but the exports slowdown and high interest rates threw a monkey wrench in the process. If MSME bad loans touch double digits as estimated, they will be the only black spot on the whiteboard as the banking sector’s overall NPAs are expected to see a decadal low of 4% this fiscal year.