UBS Securities red flags retail loans, sees credit cost soaring by up to 200 bps

Days after the Reserve Bank took an unprecedented step of warning banks of their ballooning retail book, a foreign brokerage has cautioned against increasing default risks in retail unsecured loans of banks.

According to Swiss brokerage UBS Securities, increasing default risks in retail unsecured loans of banks is likely to push up their credit losses by 50-200 bps. On October 8, the Reserve Bank had sternly warned bankers about their ballooning unsecured retail loans. Banks for many years have been riding on the retail book as corporate demand still remains anemic.

Over the past three years, retail loans at the system level averaged over 30 per cent, while other loans were not growing even a third of that, according to the central bank.

"We see increasing default risks in retail unsecured loans of banks, which is likely to push up their credit losses by 50-200 bps. We think the risk of regulatory tightening is high," UBS Securities said in a weekend note.

Accordingly, "we turn neutral on the Indian banking sector, and downgrade State Bank, Kotak Bank and Axis Bank with a sell call," the note added. According to the analysts at the brokerage, it is natural that rapid loan growth normally follows by higher defaults.

Additionally, new personal loan disbursements to borrowers with weaker credit profiles (which is as much as 22 per cent of disbursements) exposes this segment to a potential downcycle. NBFCs and state-run banks have a higher share of weak personal loan borrowers than large private banks.

Unsecured loans as a percentage of total loans rose to 11.1 per cent for SBI, 12.8 per cent for ICICI Bank and 10.7 per cent for Axis Bank, but fell to 11.9 per cent for HDFC Bank after its merger with the patent in July 2023.

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