Private banks struggle with higher small loan defaults, expected to continue until mid-2025 | Mint

India’s private banking sector anticipates an increase in small and personal loan defaults until at least the middle of 2025, say estimates based on the slowdown in economic growth, a situation that is now impacting repayments of lenders primarily in the form of unsecured credits as detailed in a report by Reuters.

This analysis shows that during the period from October to December, gross bad loan ratios of these banks increased to 1.42% to 4.7% percent of their total loan portfolios. Apart from a few specific banks that were not named, this trend is indicative of a broader trend across the banking sector’s asset quality.

Scenario has certain silver linings

The scenario although has some silver linings, the new lending rules that came into effect in November 2023 should help in addressing long-term asset quality concerns. In this regard, new lending guidelines should help in boosting the risk assessment and management practices of private banks, thereby limiting future default risks.

Despite India’s economic growth slowing to 6.4% by March, some banks are optimistic. They point to reduced loan delinquencies and stable micro-credit portfolios as positive indicators. The Reserve Bank of India (RBI) forecasts the sector’s bad loan ratio to reach 3% by March 2026.

Further, according to experts, the sector’s index is down 1.4% this year, creating buying opportunities due to valuations, distress waning in unsecured and microfinance segments.

Favorable monsoons are expected to stabilize the scenario because rural demand is also building up. This rural demand was falling, and maybe a surge in demand could be the trigger to give a stable economy over time and also a healthier banking system.

The Reuters report hence concluded by stating that private banks of India face opportunities and challenges together in the middle of a complex economic challenge. Planned adjustments and potential turnaround in rural demand are crucial elements that will help in sailing through soaring levels of loan defaults.