GNPAs Gross non performing assets ratio to improve to decadal low in FY25 MFI loans unsecured need to be watched domestic rating agency Crisil

Gross non-performing assets ratio for the banking system is set to improve to a decadal best of 2.5 per cent in 2024-25, domestic rating agency Crisil said on Tuesday.

It, however, flagged concerns around unsecured exposures like personal loans and credit cards, and also the microfinance (MFI) loans made by lenders, pointing out that the segments are witnessing a surge in stress.

Credit growth is expected to moderate to 14 per cent in FY25 from 16 per cent in FY24 on the back of lower economic growth expected at 6.8 per cent as against 8.2 per cent in FY24, and the regulatory restrictions through interventions like higher risk weights on unsecured lending which has made lenders cautious, the agency said.

Its senior director and chief ratings officer Krishnan Sitaraman, however, told reporters that the 14 per cent credit growth will place FY25 as the third fastest year over the last decade.

GNPAs, which have led to setbacks for the system in the past and have shown a considerable improvement over the last few years, will decline to 2.5 per cent in FY25 from the 2.8 per cent in the year earlier.

Even though the overall GNPAs will decline, there are signs of stress in the unsecured and MFI segment, Sitharaman said.

In unsecured loans, the overall GNPAs will climb up to 2 per cent at end FY25 from 1.5 per cent a year earlier, while the advances unpaid for over 30 days but yet to be recognized as GNPAs will move up to 2.5 per cent from 2.1 per cent, he said.

In the case of MFIs, the credit costs will rise to 3.5 per cent from 2 per cent at the end of FY24, while the collection efficiencies will go down by 2-3 percentage points below the 98 per cent observed in end FY24, he said.

Factors like borrowers getting over leveraged, loan waivers in some states and elections are impacting the MFI business, while in the case of unsecured loans, the stress is coming more from the higher delinquencies in cases where the exposures are less than Rs 50,000, he said.

Sitaraman, however, said that the reverses on MFI and unsecured are unlikely to result in sizable impact on the broader asset quality for the system as they constitute a very small proportion of the overall book.
The overall book will benefit greatly from the improvements in the corporate sector exposure which constitutes over 45 per cent of the exposure.

However, the gains on asset quality are not expected to translate into better profits for the system, and the agency feels that a dip in net interest margins of up to 0.20 per cent due to surging deposit costs will be hurting players' profitability.

On the key issue of deposit mobilization, Sitaraman said the wedge between deposit and credit growth is narrowing and the deposit growth number will close in on the 14 per cent credit growth number, he said.