Retail loans have grown faster and the share of large borrowers in gross advances have declined successively over the past three years, the Reserve Bank of India’s Financial Stability Report showed.

Potential stress in retail loans but no risk yet

Getting the push from banks, retail loans have seen a compounded annual growth rate (CAGR) of 24.8% in the last two years from March 2021 to March 2023 compared to gross advances which grew at 13.8% during this period.

Retail loans account for one-third of the banking system’s gross advances.

Despite showing signs of potential stress, the prevalence of retail loans do not pose a risk to the banking system, the bi-annual Financial Stability Report, released on Wednesday, said.

As of 31 March 2023, unsecured retail loans accounted for 25.2% of the overall retail loan portfolio of banks, up from 22.9% while secured loans fell to 74.8% from 77.1%. However, unsecured retail loans formed only 7.9% of the total banking system credit.

While the gross non-performing asset (NPA) ratio of retail loans was low at 1.4% in March 2023, the share of special mention accounts (SMA) was relatively high at 7.4% for scheduled commercial banks and accounted for a tenth of the retail asset portfolio of public sector banks, the report said.

However, SMA-1 and SMA-2 accounts, which have a higher proclivity for default, have shown improvement, with the total ratio of these two categories falling from 4.2 per cent in March 2021 to 2.3 per cent in March 2023.

SMA-1 refers to loans where repayment is due for more than 30 days but less than 60 days; SMA-2 are dues that are more than 60 days but less than 90 days. When a loan becomes overdue for 90 days, banks classify it as non-performing.

Although there has been an increase in overall SMA 1 loans during the 2022-23 (FY23) January-March quarter, the total stock of SMA category loans has fallen by 26.2% (on-quarter) in the same period, the report said.

Unsecured retail loans formed only 7.9% of the total banking system credit.

“Moreover, their (unsecured loan) asset quality has improved, with the gross NPA ratio declining from 3.2% to 2% during this period. Thus, notwithstanding few signs of potential stress in retail loans, they do not pose an imminent risk to systemic stability,” the report said.

Share of large borrowers

Big borrowers had a gross loan share of 46.4% in March 2023, down from 51.1% in March 2020. 

Their share in the gross non-performing assets (NPAs) also fell to 53.9% in March 2023, from 75.7% in March 2020.

This significantly improved the bank’s asset quality in the large borrower portfolio with the gross NPA ratio falling to 4.5% from 12.2% during this period, the report said.

Banks saw an improvement in the SMA-2 ratio in March 2023 and potential slippages were contained during the first half of FY23.

In the large borrower accounts, the proportion of standard assets to total funded amount outstanding improved to 94.3% in March 2023, from 86.2% in March 2020, with corresponding declines in NPAs, the report said.

The asset quality of top 100 borrowers also improved, with their share in banks' gross NPAs falling to 1.6% as of March 2023 from from 6.8% a year ago, the report added.