Private lenders see stress in credit cards, personal loans in Q2

Axis Bank's gross slippages jumped 36% year-on-year to ₹4,443 crore, led by unsecured loans. Gross non-performing assets (GNPA), as a percentage of total assets, however, declined to 1.44% at the end of September compared with 1.73% a year earlier and 1.54% in the previous quarter. The bank saw higher loan write-offs of ₹3,119 crore during the quarter, which helped bring down GNPA. A loan is written off when a lender recognizes it as a loss and removes it from its balance sheet because it's unlikely to be recovered.

The bank also prudently utilized its one-time tax refund of ₹550 crore to beef up its contingency provisions. It reported an 18% jump in net profit at ₹6,918 crore at the end of September quarter compared to ₹5,864 crore a year ago.

Kotak Mahindra Bank, too, saw slippages worth ₹1,875 crore at the end September quarter, up 38% sequentially and 42% year-on-year. The rise in bad loans was on account of stress in the credit card and microfinance portfolios. Overall gross NPA stood at 1.49% at the end of September quarter compared with 1.39% in the previous quarter and 1.72% a year earlier. The numbers looked lower on account of higher write-offs and upgrades and recoveries. The bank's net profit rose 5% year-on-year to ₹3,344 crore at the end of September quarter compared to ₹3,191 crore a year ago.

Also read | As deposits gain pace, focus shifts to banks’ margins, asset quality in Q2

“We have seen some slowness in the rural aspects of India. And that was affected in terms of commercial vehicles, tractors, and of course we've seen some stress in the microfinance industry as well as some over-leveraging of customers which reflects in personal loans and credit cards," said Ashok Vaswani, managing director and chief executive officer, Kotak Mahindra Bank. “Increase in the slippage, around 30-40% of that, would be from the credit card business."

HDFC Bank was the outlier with asset quality remaining stable. Gross non-performing assets as a percentage of total assets stood at 1.4% at the end of September quarter compared to 1.3% in the previous quarter. While the bank has moderated its growth in unsecured loans to 10% for FY24 compared to 19% in the previous year, HDFC Bank saw slippages in the agriculture loan portfolio, where the share of stressed loans continued to be high. The bank's net profit stood at ₹16,821 crore at the end of September quarter compared to ₹15,976.1 crore a year ago.

To be sure, the rise in stress in the unsecured loan segment has been showing up in the books of lenders from the first quarter itself. Mint reported in August how in the first quarter of FY25, several lenders saw a sharp spike in bad loans in both personal loans and credit card portfolios. According to data from credit bureau TransUnion Cibil, the volume of credit card dues where repayments are delayed by over 90 days has increased 17 basis points (bps) year-on-year to 1.8% in June. This rise in credit card defaults was mainly because a section of borrowers exhausting their credit limits and are unable to repay.

While bankers assure that the rise in small-personal-loan delinquencies are yet to reach alarming levels, they are not sure when this trend will peak.

Also read | Deposits outpace loans in relief for private banks

“….from what the industry data that we have seen from bureau, there has been a rise in delinquencies across unsecured for the industry and we have seen similar signs in our portfolio," said Arjun Chowdhry, group executive and head of retail assets, payments and affluent banking at Axis Bank. “Very difficult to say that this is the peak, this is the start etc, but we do keep monitoring and watching this portfolio and if there is any necessary action that needs to be taken. We take it at an appropriate time and obviously the objective is to monitor this portfolio closely." 

But RBL management believes that stress in the microfinance portfolio will remain for some time as compared with credit cards. The private sector lender added fresh bad loans worth ₹1,026 crore during the second quarter, resulting in gross NPA as a percentage of total loans at 2.88%. Provisioning jumped 59% year-on-year to ₹618 crore, driven by higher slippages in credit cards and microfinance. Net profit, therefore, grew just 2% year-on-year to ₹223 crore at the end of September quarter.

“We are seeing improvement on cards, but we will have to wait and watch for MFI which might deteriorate a little more before coming back," said Jaideep Iyer, head-strategy, RBL Bank. “On a quarterly basis, stress should probably start coming down from Q4 and Q3 should be similar or slightly lower or slightly higher, something in that range."

That said, all banks saw sequential growth in personal loans and credit cards with HDFC bank reporting a 3.5% rise, followed by 2.6% growth for Axis Bank and 1% growth for Kotak Mahindra Bank. 

And read | MFI stress to weigh on small finance banks’ loan growth, asset quality

To be sure, RBI's restrictions on Kotak Mahindra Bank to stop issuing new credit cards is yet to be lifted. At a time when most peers are guiding to de-grow the retail book or grow it cautiously, Kotak Mahindra bank is going in the opposite direction by acquiring the personal loan portfolio of Standard Chartered Bank worth ₹4,100 crore. According to the management, the acquisition gives them access to the foreign bank's affluent customers, which will help improve overall credit quality and profitability.

“Apart from scaling personal loan business, this also gives us 95,000 upward customers with whom we are hoping to establish a much broader relationship," said Vaswani. “This is an important tough-hit acquisition for us and we look to do more of such transactions going forward."