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20 October 2023 India | Equity Research | Sector Update

Banking

Unsecured personal loans’ risk weight may rise, but material shocks to asset quality unlikely

The RBI governor, during Oct’23 monetary policy meeting, highlighted that the Indian banking system continues to be
resilient, backed by improved asset quality, stable credit growth and robust earnings growth. However, he also
mentioned that certain components of personal loans are recording very high growth. We believe, progressive-strong-
growth in unsecured retail could push the RBI to restore higher risk weights on the segment. Apart from dampening
growth, RBI action could also initiate discussion on segment’s asset quality and cycle reversal, in our view. Positively,
data on retail GNPA, SMA levels and customer on-boarding is encouraging. Retail GNPA% is at its lowest for the last
eight years; the improvement seems broadly similar across both secured and unsecured.

On-boarding data for retail loans suggests lower share of NTC and below-
Jai Prakash Mundhra
prime customers. High-frequency bounce data suggest multi-years’ low failure jai.mundhra@icicisecurities.com
rate. While we remain vigilant on the incremental stress, we do not expect any +91 22 6807 7572
material shock to retail asset quality in the near term. Chintan Shah
Higher growth in unsecured retail catches RBI’s eye chintan.shah@icicisecurities.com
Renish Bhuva
The RBI governor, during the Oct’23 policy meet, noted that the Indian banking
renish.bhuva@icicisecurities.com
system continues to be resilient, backed by improved asset quality, stable
Vaibhav Arora
credit growth and robust earnings growth. However, he also mentioned that
vaibhav.arora@icicisecurities.com
“certain components of personal loans are, however, recording very high
growth. These are being closely monitored by the Reserve Bank for any signs
of incipient stress”.
Progressive strong growth could push RBI to hike risk weights
back to 125%, and thus dampen growth
Post-pandemic, unsecured loans have resumed their ascent – share (of overall
retail) advancing to 32.2% as of FY23 and further to 32.7% as of Aug’23. In our
view, progressive strong growth could push the RBI to hike risk weights on the
segment back to 125% (vs. 100% currently), which would clearly dampen
growth. Important to note that RBI had lowered the risk weights on unsecured
personal loans from 125% to 100% in Aug’19 and thus the assumed hike
would mean just restoration of the weight.
Could initiate debate on segment asset quality; stress could
start normalising though unlikely to result in any shock
RBI hiking risk weights on unsecured loans, if announced, could also initiate
debate on the segment’s asset quality. India has not seen a full-blown retail
stress since 2008-09 and the segment (barring MFI) performance during
pandemic has been reasonably better. However, memories of corporate asset
quality cycle (2016-19) are still fresh in the minds of investors; thus caution
from the RBI may hint at cycle reversal and the issue can remain lively in
investor discussions ahead. Positively, data on retail GNPA, SMA levels and
customer on-boarding is encouraging. Retail GNPA% is at its lowest for the
last eight years and the improvement seems broadly similar across both
secured and unsecured. SMA portfolio in retail seems concentrated toward
SMA0 bucket. There is no material difference in the SMA1+2 levels between
secured and unsecured retail. Incremental on-boarding for retail loans
suggests lower share of NTC and below-prime customers. High-frequency
bounce data suggests multi-years’ low failure rate for recurring payments.
While we remain vigilant on the incremental slippages, we do not expect any
material shock to retail asset quality in the near term.

Please refer to important disclosures at the end of this report

Banking | Sector Update | 20 October 2023

Unsecured retail loans rising at faster clip; share now at ~10% of

overall credit and ~33% of overall retail
Over the last few years, retail loans have come to be the key driver of overall credit
growth – clocking ~16.5% CAGR between FY19–23, as against 12.1% CAGR for non-
food credit for the same period. Within retail, unsecured loans (other personal loans
and credit card loans) have grown at a faster clip, while secured home loans have
grown at a slightly slower pace.
The share of unsecured loans (in overall retail loans) has been progressively growing,
albeit with a minor blip pushing the figure down during the initial phase of the
pandemic to 29.7% in FY21 (vs. 31.7% in FY20). Post-pandemic, unsecured loans have
resumed their rising trajectory – share advancing to 32.2% (of overall retail) as of FY23
and further to 32.7% as of Aug’23. As compared to overall loans, unsecured retail loans
share has risen to ~10% as of Aug’23 versus 8.1% as of FY19.

Retail has been the key growth driver of systemic credit for the last few
years

25 Non-food credit (YoY % change) Retail loans (YoY % change)

22
21
20
20 18
16
15 15
15
12 13
11
10 9

6
5

0
FY19 FY20 FY21 FY22 FY23 Aug-23
Source: RBI, I-Sec research

Within retail, strong unsecured (other personal loans and credit card) has caught RBI’s attention

Housing (Including Priority) Credit Card Other personal loans Total retail loans
40

30
YoY % change

20

10

0
Apr-19

Dec-19

Apr-20

Dec-20

Apr-21

Dec-21

Apr-22

Dec-22

Apr-23
Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Aug-19

Aug-20

Aug-21

Aug-22

Aug-23
Oct-19

Feb-20

Oct-20

Feb-21

Oct-21

Feb-22

Oct-22

Feb-23

Source: RBI, I-Sec research

India | Equity Research 2

Banking | Sector Update | 20 October 2023

After a dip in FY21 due to pandemic, share of …and to around 32.7% of the total retail loans
unsecured retail has risen to ~10% of overall non-food vs. 30.2% as of FY18.
credit as of Aug’23 (vs. 7.5% in FY18)…
12 Other personal loans (% of non-food credit) Other personal loans (% of total retail credit)
40
Credit Card o/s (% of non-food credit) Credit Card o/s (% of total retail credit)
10
35

8 30

25
6
8 8 20
8 27 27 28
7 7 27 27 25 26
7
4 7 15

10
2
5
1 1 1 1 1 1 2 4 4 4 4 4 5 5
0 0
FY18 FY19 FY20 FY21 FY22 FY23 Aug-23 FY18 FY19 FY20 FY21 FY22 FY23 Aug-23

Source: RBI, I-Sec research Source: RBI, I-Sec research

Retail GNPAs well contained; improving to lowest levels (1.4%: FY23)

in the last eight years
Unlike corporate loans, despite being hurt by the pandemic, GNPAs in the retail
segment have been consistently range-bound. This is in part due to timely and
prudential write-offs practiced by the banks in the current cycle. Due to covid-19
headwinds, GNPA levels increased from 1.8% in FY19 to 2.0–2.1% for FY20/21.
However, with receding headwinds, GNPAs reverted to pre-covid levels at ~1.8% by
FY22, before improving to multi-year lows of 1.4% by FY23. Important to note that the
improvement seems to stem from both secured and unsecured segments, as GNPAs
for housing loans (47% of the total retail loans) have also seen similar improvement to
1.3% (FY23) versus 2.0%/1.7% for FY21/22.

Unlike other segments, retail GNPAs have been consistently range-bound

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

25
22.8
17.7
Sector-wise GNPA ratio (%)

17.5

20
14.1

15
11.9

11.3
10.1
9.8
9.4
8.5

8.4

10
7.5

7.7
7.2
7.0
6.0

6.0
6.0
5.8

5.8
5.7
5.4

5.2
5 3.9
2.1
2.0
2.0

2.0
1.8

1.8

1.8

1.4

0
Agriculture Industry Services Retail
Source: RBI, I-Sec research

India | Equity Research 3

Banking | Sector Update | 20 October 2023

Retail GNPAs increased marginally to 2.0%/2.1% for FY20/21, but have

improved sharply to 1.8% by FY22 and further to multi-years low to 1.4% by FY23

2.5

2.1
2.0

2.0

2.0
1.8

1.8

1.8
2.0

1.4
1.5
(%)
1.0

0.5

0.0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: RBI, I-Sec research

Unsecured retail GNPAs also improve to 2%; SMA levels elevated,

but concentrated in SMA 0 bucket
As is the case with overall retail loans, asset quality in unsecured retail loans has also
improved. As per the RBI, the GNPA ratio for unsecured retail loans declined to 2% as
of FY23, from 3.2% in FY21.
The share of Special Mention Accounts (SMA) in overall unsecured retail loans stands
relatively elevated at ~6.9% as of FY23. However, within SMA, a notably thick
proportion is towards SMA 0, at 4.6%, as compared to riskier buckets of SMA 2 (0.6%)
and SMA 1 (1.7%). Bank group-wise, the SMA loans proportion in unsecured retail
advances is higher at PSU banks, at 9.8%, versus just 4.0% for private banks. Similarly,
SMA 1+2 proportion in unsecured loans is higher at PSU banks, at 3.1%, versus 1.1%
for private banks.

Improvement in retail GNPAs seem to be coming from both secured and

non-secured segments

Housing GNPA (%) Retail GNPA (%)

2.5
2.1
2.0
2.0 1.8
1.7

1.5 1.4
1.3

1.0

0.5

0.0
FY21 FY22 FY23

Source: RBI, I-Sec research

India | Equity Research 4

Banking | Sector Update | 20 October 2023

While overall SMA levels in unsecured retail loans are elevated at 6.9%,
there is a significant concentration to SMA 0 bucket.

Unsecured retail SMA levels (%)

PSBs Private banks SCBs

8
6.8
7
6
5 4.6

4
2.9
3 2.4
1.7
2
0.8 0.7 0.6
1 0.3
0
SMA 0 SMA 1 SMA 2

Source: RBI, I-Sec research

No material difference in secured and unsecured asset quality as yet

While there is a sharp difference in unsecured retail SMA levels between private and
PSU banks, interestingly, we highlight that SMA levels for both private and PSU banks
are broadly similar when it comes to secured and unsecured retail.
As per RBI data, SMA share for overall unsecured retail advances is a shade lower
than secured advances. SMA 1+2 proportion for overall unsecured retail advances
stood at 2.3%, as compared to 2.7% for secured retail advance.

SMA share of retail advances across categories suggests a) SMA loans

are concentrated in SMA 0 bucket and b) there is not much difference in secured
and unsecured retail.
SMA-0 (%) Unsecured Retail Advances Secured Retail Advances Retail Advances
PSBs 6.8 5.4 5.7
Private banks 2.9 3.9 3.6
SCBs 4.6 4.7 4.7

SMA-1 (%) Unsecured Retail Advances Secured Retail Advances Retail Advances
PSBs 2.4 2.8 2.7
Private banks 0.8 1.1 1.0
SCBs 1.7 2.0 1.9

SMA-2 (%) Unsecured Retail Advances Secured Retail Advances Retail Advances
PSBs 0.7 1.0 0.9
Private banks 0.3 0.4 0.4
SCBs 0.6 0.7 0.7

Total SMA
Unsecured Retail Advances Secured Retail Advances Retail Advances
(%)
PSBs 9.8 9.2 9.4
Private banks 4.0 5.4 5.0
SCBs 6.9 7.4 7.3
Note: As of Mar’23, March 31, 2023
Source: RBI, I-Sec research

India | Equity Research 5

Banking | Sector Update | 20 October 2023

PSU banks have higher proportion of SMA loans

Secured retail advances

SMA-0 (%) SMA-1 (%) SMA-2 (%) Total (%)

10 9.2
1.0 7.4
8
2.8 0.7
6 5.4
2.0
0.4
1.1
4
5.4 4.7
2 3.9

0
PSBs Private banks SCBs

Source: RBI, I-Sec research

Interestingly, SMA-2 loans are benign at Similarly, total SMA % is similar for both
<1% across secured as well as unsecured loans… unsecured and secured loans for both Private and PSBs

SMA-2 (%) Total SMA (%)

1.5 12.0
PSBs Private banks SCBs PSBs Private banks SCBs
9.8 9.4
10.0 9.2
1.2
1.0
0.9 8.0 7.4 7.3
6.9
0.9
0.7 0.7 0.7 5.4
0.6 6.0 5.0
0.6 4.0
0.4 0.4 4.0
0.3
0.3
2.0

0.0 0.0
Unsecured Retail Secured Retail Retail Advances Unsecured Retail Secured Retail Retail Advances
Advances Advances Advances Advances

Source: RBI, I-Sec research Source: RBI, I-Sec research

Customer on-boarding for retail loans seems to have improved with

lower share of NTC and below prime customer
The quality of incremental credit has improved with the share of below prime and new
to credit (NTC) borrowers. As per TransUnion CIBIL, the proportion of NTC customer
have reduced from 12.7% in Sep’21 to 8.1% in Mar’23. The data suggest YoY reduction
in below-prime borrowers for all groups of lenders for Mar’23.

TransUnion CIBIL data suggest reduction in Below Prime borrowers

YoY for all groups of lenders
Select NBFCs (24) All NBFCs All PSBs All private banks Industry
Score band Mar-22 Mar-23 Mar-22 Mar-23 Mar-22 Mar-23 Mar-22 Mar-23 Mar-22 Mar-23
Subprime 25.9 22.3 31.6 27.2 33.0 28.4 16.5 15.3 27.4 24.2
Near prime 23.3 25.4 23.3 24.9 26.3 26.6 15.5 16.2 22.4 22.8
Prime 35.4 37.2 32.8 35.6 26.4 27.7 34.2 35.7 30.4 32.5
Prime plus 14.0 13.3 11.3 11.0 10.9 12.0 21.9 22.6 14.3 14.7
Super prime 1.5 1.8 1.0 1.3 3.5 5.2 11.9 10.2 5.6 5.8
Total 100 100 100 100 100 100 100 100 100 100
Below Prime 49.1 47.8 54.9 52.1 59.2 55.0 32.1 31.4 49.8 46.9

Source: RBI, TransUnion CIBIL, I-Sec research

CIBIL scores and risk tiers are as follows: Prime:791-900, Prime Plus: 771-790, Prime:731-770. Near Prime:681-730 and
Sub Prime:300-680.

India | Equity Research 6

Banking | Sector Update | 20 October 2023

Quality of incremental credit seems to be improving with progressive

decline in the share of lower-rated borrowers (below-prime and NTC borrowers)

Source: RBI, TransUnion CIBIL, I-Sec research

NTC stands for new to credit. CIBIL scores and risk tiers are as follows: Prime:791-900, Prime Plus: 771-790, Prime:731-
770. Near Prime:681-730 and Sub Prime:300-680.

India | Equity Research 7

Banking | Sector Update | 20 October 2023

High-frequency bounce data suggests steady asset quality and no

rise in stress; though lower ticket size seems relatively under pressure
High-frequency data on bounce rates also corroborates steady retail payment
behaviour and does not indicate any material rise in the asset quality risk. Within
recurring payments, the proportion of bounce rate (returns/presentation) – value-wise
– has been consistently contained.
During the pandemic, the bounce rate had jumped to 38%, which clearly was a
precursor to elevated retail slippages. The same rate has been successively easing-off,
in line with receding pandemic headwinds. For the month of Aug’23, the bounce rate
(value-wise) has been over 50 months low (and much better vs pre-Covid times) at
~20.8% suggesting continued benign payment behaviour. The bounce rate in terms of
volume has also followed the similar improving trajectory though the levels are still
slightly above pre-covid levels.
A closer look at value-wise and volume-wise bounce rate time-series suggests that
the bounce rate by volume has been consistently higher than value-wise, suggesting
some hardship for lower value loans.

After spike during pandemic, bounce rates (return / presentation) have

been in a consistent downward trajectory and show no signs of stress as yet

Recurring Payments - Returns/Presentation - Value (%)

38.1

40.0

35.0
31.7
27.6

27.5

30.0
25.4
25.1
24.4

22.8
22.3

22.1

22.0
25.0
22.0
21.8
21.5

21.5

21.3

21.1
20.9

20.8
20.4

20.0
Dec-18

Dec-19

Dec-22
Sep-22

May-23
Sep-19

Sep-20

Sep-21

Apr-23

Jul-23
Jun-19

Jun-20

Jun-22

Jun-23
Mar-19

Mar-20

Mar-21

Mar-22

Aug-23
Mar-23

Source: NPCI, I-Sec research

Similarly, bounce rates by volume also have been steady and benign

Recurring Payments - Returns/Presentation- Volume (%)

50.0
45.4

40.8

45.0

40.0
33.8

32.8

31.7
30.9

35.0
30.5

29.6

29.5
29.4
29.4

29.4
29.3
29.3

29.3
29.2

29.2
28.5

30.0
25.3
24.1

25.0

20.0
May-23
Dec-18

Dec-19

Dec-22

Apr-23

Jul-23
Jun-19

Jun-20

Jun-22

Jun-23
Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Aug-23
Sep-19

Sep-20

Sep-21

Sep-22

Source: NPCI, I-Sec research

India | Equity Research 8

Banking | Sector Update | 20 October 2023

A close look suggests some headwinds for lower ticket size loans, as
volume bounce rate has been consistently higher than value bounce rate

Recurring Payments: Returns/Presentation (%)

50
Return % - Volume Return % - Value
45

40

35

30

25

20

May-23
Dec-18

Dec-19

Dec-22

Apr-23

Jul-23
Jun-19

Jun-20

Jun-22

Jun-23
Mar-20

Mar-21

Mar-22

Mar-23

Aug-23
Mar-19

Sep-19

Sep-20

Sep-21

Sep-22
Source: NPCI, I-Sec research

RWA density could restore upwards; retail GNPAs could rise from
multi-year low, but material shock to retail asset quality unlikely
We acknowledge faster growth in unsecured retail loans in the last few quarters and
believe that continued strong growth could push RBI to restore RWA weights back to
125% (vs. 100% currently). In secured mortgages, we have seen almost full 250bps
rate hike transmission. In contrast, we have seen only a partial transmission for
unsecured retail, which apart from competition, also suggests continued healthy
underlying asset quality.
We believe a sharper rise in product pricing by banks should mostly precede any
significant deterioration in underlying asset quality. As borne out from the bounce data,
we see continued hardship in low-ticket recurring payments, but are not worried as
overall bounce rate remains quite benign. As retail GNPAs have hit its lowest levels of
1.4% in the last eight years (if not more), we believe there could be a marginal upward
rise. While we are vigilant on this front, we do not see any material shock in the near
term in retail asset quality of the banks.

India | Equity Research 9

Banking | Sector Update | 20 October 2023

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India | Equity Research 10

Banking | Sector Update | 20 October 2023

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Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. None of the
research recommendations promise or guarantee any assured, minimum or risk free return to the investors.
Name of the Compliance officer (Research Analyst): Mr. Atul Agrawal, Contact number: 022-40701000, E-mail Address : complianceofficer@icicisecurities.com
For any queries or grievances: Mr. Prabodh Avadhoot Email address: headservicequality@icicidirect.com Contact Number: 18601231122

India | Equity Research 11