Banks See Rise in Bad Loans After a Long Time; What It Means for Investors

Banks like HDFC, Axis, Mahindra Finance, and IndusInd are seeing an increase in bad loans, also known as non-performing assets (NPAs). This is causing them to set aside more money to cover potential losses.

For example, ICICI Bank’s provisions went up by 85.4% compared to the last quarter and by 3.07% compared to last year. Similarly, Axis Bank’s provisions rose by 72.07% quarter-on-quarter and 97% year-on-year. Federal Bank and IndusInd Bank also reported significant increases in their provisions.

Decline in Provision Coverage Ratios

Many banks, including ICICI, Bajaj Finance, and Federal Bank, saw their provision coverage ratios (PCR) drop. This ratio indicates the amount of money set aside to cover bad loans. PCR for these banks fell to between 56.1% and 79.7% in Q1 FY25, down from 57.0% to 80.3% in the previous quarter and 60.4% to 82.4% a year ago. This suggests banks are using their reserved funds to meet higher provisioning needs.

Is This a Turning Point?

Analysts are questioning if this rise in bad loans marks the end of the period of good asset quality. Pranav Gundlapalle from Sanford C Bernstein highlighted concerns, especially as banks like Axis and Bajaj Finance report higher credit costs.

Return of Bad Loans?

Since the end of the COVID-19 pandemic, banks have seen steady loan repayments and fewer bad loans. However, in Q1 FY25, there has been a rise in bad loans, especially in agriculture, rural, microfinance, and unsecured retail loans. Some banks attribute this to cyclical stress in agriculture and microfinance, while others blame election-related disruptions and heatwaves.

Impact on Unsecured Loans

Banks are also seeing more bad loans in unsecured retail loans like personal loans and credit cards. IndusInd Bank noted that rural borrowers are still recovering from the pandemic, and Bajaj Finance reported a 3% increase in customers who have borrowed from multiple lenders.

Increase in Loan Loss Provisions

The increase in bad loans, especially from loans that are up to 30 days past due, led to higher loan loss provisions for banks. Some banks also wrote off bad loans proactively, adding to the provisioning pressure.

Future Outlook

Banks believe the current collection issues are temporary and expect improvements starting in July. However, they remain cautious about stress in rural and unsecured loan portfolios and will have a clearer picture in the third quarter of FY25. Analysts warn that managing higher provisioning amid tight liquidity could lead to a normalization of asset quality ratios in the coming quarters.