Indian banks’ underwriting requirements in danger amid fast shopper mortgage progress

The asset high quality of Indian banks’ shopper loans has held up nicely to this point, however an accumulation of “untested dangers” because of fast progress might problem lenders’ underwriting requirements and threat controls, Fitch Scores mentioned on Monday.

“Fitch’s evaluation of Indian banks’ threat profiles additionally components in decrease transparency by way of knowledge disclosures on retail underwriting, akin to loan-to-value ratio, borrower debt serviceability, credit score bureau scores, and restoration charges, than most Asian banking techniques,” the score company mentioned in a press release.

Indian banks have reported robust mortgage progress over the previous couple of quarters, boosted by shopper spending amid agency financial progress.

Banks’ loans rose 19 per cent within the two weeks to April 19 from a 12 months earlier, the newest knowledge from the central financial institution confirmed.

Retail loans, or loans given to shoppers, which represent about 10per cent of all financial institution loans, have grown at an annual fee of 20 per cent since 2020-21, Fitch estimates.

Most lenders have reported an enchancment of their asset high quality however have banked on unsecured credit score to broaden margins.

In November, the Reserve Financial institution of India elevated threat weights on sure mortgage classes to enhance buffers towards the potential for threat buildup. It has additionally utilized enterprise restrictions to sure entities in circumstances of supervisory issues and is proposing to extend provisioning for mission finance.

Whereas the RBI’s measures can foster better warning in direction of risk-taking, their effectiveness “via the cycle” isn’t but confirmed, Fitch mentioned.

Asset high quality pressures from the earlier credit score cycle are subsiding, creating a good enterprise setting. Nonetheless, loss absorption buffers, notably at state-run banks, stay “average” towards excessive focus dangers and renewed curiosity in sectors akin to infrastructure and development, Fitch mentioned.

Banks’ threat urge for food via larger mortgage progress will stay a key consideration for his or her intrinsic creditworthiness regardless of improved monetary efficiency, it mentioned.