Citi expects lower stress in financial sector but sees risk build-up in consumer credit

After the RBI's report titled ‘Report on Trend and Progress of Banking in India' (dated December 27, 2023) mentioned that both banks, as well as NBFCs in the country, have registered growth in their balance sheet during 2022–23 and 2023–24, global brokerage Citi came up with its take on the sector’s performance, wherein it highlighted that stress in the financial space is lower than envisaged.

Amid the broad-based sell-off, Nifty Bank and Nifty Financial Services in early trade on Friday (December 29) saw a drag of up to 0.38 per cent.

The global brokerage pointed out that banks are well-capitalised and capable of absorbing shocks over a one-year horizon.

Further, on the negative side, the brokerage stated that some risk is building up in consumer credit. It added that 42.7 per cent of borrowers availing consumer loans already have three ongoing loans during origination, and 30.4 per cent have availed more than three loans in the last six months.

Additionally, the brokerage noted that 7.3 per cent of customers availing personal loans of over Rs 50,000 had at least one overdue personal loan.

Another integral point it noted is that the recent risk weight increase would lead to a 71bps/58bps decline in the capital-to-risk weighted assets ratio/Common Equity Tier 1 capital (CRAR/CET-1). 1 bps, or basis point, is 1/hundredth of a percentage point.

Recently, the RBI, to mitigate the heightened systemic risk amid the unprecedented growth in unsecured loans, has increased the risk weights associated with unsecured loans by 25 per cent for both banks as well as NBFCs.