UBS Warns Unsecured Loans May Soon Face Risk of Defaults

The share of borrowers with more than five personal loans rose to 7.7% in March this year from 1% in 2018

A rapid growth in unsecured personal loans at Indian lenders may soon become a headache amid deepening concerns over the rising risk of defaults among households, according to UBS Group AG.

The brokerage sees credit costs for Indian lenders climb toward “historical averages” as more unsecured retail loans turn sour, with state-run banks more vulnerable to this trend, compared to their private sector counterparts.

“We see increasing default risks in retail unsecured loans, which is likely to push up their credit losses by 50-200bps,” analysts Vishal Goyal, Anish Rai and Yash Agarwal wrote in a note. Earlier this month, the country’s banking regulator, the Reserve Bank of India, exhorted lenders to assess their risk strategies on their personal loan exposures.

UBS warned that “the risk of regulatory tightening is high” after RBI Governor Shaktikanta Das told reporters last week that the central bank wants banks to be mindful and “smell where the crisis is likely to come up.” Usually, such suggestions from the regulator are followed by tighter macro-prudential norms for lenders.

Reflecting some of the angst, the National Stock Exchange of India Ltd.’s bank gauge declined as much as 0.9% led by Axis Bank Ltd. and State Bank of India. UBS downgraded SBI to sell, while Axis Bank was cut to neutral rating.

“While valuation seems inexpensive, we see limited scope of a re-rating, considering our expectations of decelerating earnings growth,” UBS said.
Unsecured retail loans such as credit cards and personal loans have grown at an annual rate of 23% over the past five years in India, according to UBS, outstripping the increase in overall credit in the system as many resorted to borrowings to meet personal expenses amid plummeting household savings and the Covid pandemic.

The share of borrowers with more than five personal loans rose to 7.7% in March this year from 1% in 2018, UBS said, adding that incremental disbursements to borrowers with “weaker credit profile” exposes the segment in a downturn. As much as 52% of the personal loans portfolio at state-owned banks was to “medium to high risk” borrowers, while the share for private sector banks was pegged at 31% as of June, it said.