Indian Banks’ Asset Quality Outlook Remains Stable As Unsecured Lending Stress Eases: Goldman Sachs

New Delhi, Aug 25 (KNN) Indian banks are likely to maintain stable asset quality, with deleveraging in unsecured lending limiting fresh stress, while the impact of the West Asia crisis on asset quality is expected to remain limited, according to a Goldman Sachs report.

The report said the asset quality outlook for Indian banks has improved significantly over the past five years, with overall stress remaining contained. Concerns have largely been concentrated in granular unsecured loans, particularly consumer unsecured credit and microfinance (MFI).

Goldman Sachs said aggressive lending in these segments had contributed to overleveraging and triggered a non-performing loan (NPL) cycle, with the impact largely concentrated among mid-sized private banks. 

State-owned banks had limited exposure to these segments, while large private banks experienced negligible to manageable stress.

Deleveraging Limits Fresh Stress

The risk of fresh bad loans in these segments remains low following significant deleveraging over the past 12-18 months.

The MFI loan book contracted 25 per cent from its peak of Rs 4.4 trillion in March 2024, while consumer unsecured loan growth slowed to 10-12 per cent in FY25-26 from 25-30 per cent in FY23-24.

Despite the moderation, consumer credit remains structurally underpenetrated in India, with unsecured loans accounting for around 18 per cent of the overall retail loan book, the report said.

In MFI, around 80-90 per cent of loans at several banks are now covered by the government-backed Credit Guarantee Fund for Micro Units (CGFMU), providing a cushion against a sharp rise in NPL formation.

MSME Loans Emerge As Key Asset Quality Watchpoint

Goldman Sachs said the main emerging concern for bank asset quality is the MSME loan segment, which has expanded at a compound annual growth rate of around 20-25 per cent over the past three to five years.

However, the brokerage said it remains relatively less concerned about the segment, noting that banks have not significantly moved down the risk curve and a substantial portion of MSME lending is backed by adequate collateral.

It cautioned that MSME borrowers could face greater pressure if the impact of the West Asia crisis or El Niño proves more severe than currently expected.

(KNN Bureau)