Rural loans, small biz see stress rising

Apart from India’s largest lender State Bank of India (SBI), non-bank lenders such as Bajaj Finance, Cholamandalam Finance, and L&T Finance have pointed to stress pockets in some sectors. Banks and non-bank lenders alike have turned cautious after a lending binge in the past led to an oversupply of credit and higher indebtedness.

On 26 July, Bajaj Finance told analysts that it is seeing increasing leverage even among rural consumers and has taken risk actions in the rural B2C (business-to-consumer) business, leading to muted growth in the first quarter. The non-banking financial company (NBFC) is taking pre-emptive actions to safeguard its balance sheet.

“That is the only thing we are watching for and acting on in a nuanced manner to ensure we stay out of trouble but remain in the game," Rajeev Jain, the managing director of Bajaj Finance, told analysts on 26 July.

L&T Finance is seeing fault lines develop in loans to first-time borrowers of unsecured credit and in the less-than ₹50,000 category of unsecured loans, chief executive Dinanath Dubhashi told analysts on 20 July.

Yet, banking experts believe there is no cause for immediate concern. Suresh Ganapathy, the managing director and head of financial services research at Macquarie Capital, agreed there are some pockets of stress, pointing to Cholamandalam Finance’s mention of some micro-markets that have seen a lending spree and over-leveraging. “Next segment to closely watch is SME (small and medium enterprises)—everyone is gung-ho on the SME space, and we will have to see how they witness a downturn in the economic cycle," he said, adding it is not yet time to panic.

Apart from agriculture and personal loans, lenders also pointed out incipient stress in their micro, small, and medium enterprise (MSME) portfolio. Small businesses are typically more vulnerable to changes in the external environment and rate changes. Their loans are mostly linked to external benchmarks like the repo rate, which has increased 250 basis points (bps) since May 2022, affecting repayment capability.

“MSME loans have historically been more susceptible than other segments. Following the Emergency Credit Line Guarantee Scheme (ECLGS) scheme, moratorium, and debt recasts, these loans got corrected to a great extent, and as the environment normalizes, MSMEs might look more vulnerable compared to ‘the corrected era’," said Sanjay Agarwal, senior director at Care Ratings.

The government-backed ECLGS was rolled out to support small businesses during the covid-19 outbreak and later extended to other covid-hit sectors. The scheme ended on 31 March. To be sure, small businesses reported stronger asset quality in FY23 as their gross bad loan ratio declined from 9.3% in March 2022 to 6.8% in March 2023. However, one-sixth of accounts and one-twentieth of the amount disbursed soured in FY23, according to the Reserve Bank of India (RBI).

In the June quarter, SBI posted higher slippages—fresh bad loans—worth ₹7,659 crore against ₹3,185 crore in the preceding three months. The bank’s special mention accounts (SMA) one and two—or loans which have not been repaid in 31 to 90 days—rose from ₹3,260 crore in the March quarter to ₹7,221 crore in the June quarter, but the bank said it has already regularized about ₹1,500 crore till the end of July. SBI chairman Dinesh Khara told reporters that stress is emanating from small business and agriculture segments.

SBI extends unsecured personal loans as well, but mostly to state or central government employees with stable salaries, and therefore, has not seen stress here. “It does appear that rural demand has not yet picked up based on commentaries from companies that have declared their financial results. Companies were expecting Q1 of this year to be better than Q4 of the last fiscal, but this has now been deferred to the festive season," said Madan Sabnavis, chief economist at Bank of Baroda.

Meanwhile, rural consumption has remained subdued, as evident in the declining number of two-wheeler and farm tractor sales. That apart, according to data compiled by Care Ratings, rainfall distribution has also been uneven, leading to a lag in Kharif sowing. While states in north-west and central India witnessed above-normal rainfall, eastern India remains deficient.