UBS has projected a significant increase in credit losses for Indian banks, anticipating a rise between 50-200 basis points due to escalating defaults on retail unsecured loans. These loans, which make up 8-12% of the banks' portfolios, include small-ticket personal loans below ₹50,000 and larger loans above ₹10 lakh. This forecast was made on Friday.
The risk is amplified by an increase in lending to overdue borrowers and the rapid expansion of unsecured personal loans. Reserve Bank of India Governor Shaktikanta Das has expressed concerns over this trend and advised stronger surveillance mechanisms to mitigate potential risks.
State-owned banks and non-banking financial companies (NBFCs), which hold a significant market share and serve customers with weak credit profiles, face a higher default risk. Specifically, NBFCs account for a substantial 74% share of small-ticket personal loans.
In response to the anticipated increase in credit costs, UBS has downgraded State Bank of India (SBI) and Axis Bank. The bank also adjusted Axis Bank's price target to ₹1,100 (USD1 = INR83.235), reflecting a 10-bps increase in credit costs, a 5% decline in earnings per share, and the impact on CET-1 ratios resulting from the lenders' low capital buffers.
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