Banking sector heading to default risk on retail loans

Rising Risk

♦ Swiss brokerage turns neutral on the Indian banking sector

♦ Downgrades SBI, Kotak Bank and Axis Bank with a sell call

♦ Warned bankers on ballooning unsecured retail loans

♦ Corporate demand still remains anemic

Mumbai: Days after the Reserve Bank took an unprecedented step of warning banks of their ballooning retail book, a foreign brokerage has cautioned against increasing default risks in retail unsecured loans of banks.

According to Swiss brokerage UBS Securities, increasing default risks in retail unsecured loans of banks is likely to push up their credit losses by 50-200 bps. On October 8, the Reserve Bank of India (RBI) had sternly warned bankers about their ballooning unsecured retail loans. Banks for many years have been riding on the retail book as corporate demand still remains anemic. Over the past three years, retail loans at the system level averaged over 30 per cent, while other loans were not growing even a third of that, according to the central bank.

“We see increasing default risks in retail unsecured loans of banks, which is likely to push up their credit losses by 50-200 bps. We think the risk of regulatory tightening is high,” said UBS Securities in a weekend note.

Accordingly, “we turn neutral on the Indian banking sector, and downgrade State Bank, Kotak Bank and Axis Bank with a sell call,” the note added.

According to the analysts at the brokerage, it is natural that rapid loan growth normally follows by higher defaults.