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« Slow growth forces realtors to cut rentals by 10-15% | Home | Icelandic Bank Encouraging Midland Firms To Woo India »

Increasing bad loans a worry for Indian banks

The rising bad loans are set to pose a huge challenge in the next few years for the banking and finance industry. Banks have already stopped or tightened lending norms for consumer finance and auto loans for fear of higher defaults. Rising interest rates have increased the possibilities of defaults, particularly among customers holding credit cards.

Meera Sanyal, country executive, ABN Amro Bank, India, admitted there has been a slight increase in delinquencies for the bank in the credit card and personal loan segments. “But the medium-term outlook remains positive,” Sanyal said at the sidelines of a banking conference here.

ICICI Bank, the leader in retail lending in India, is expecting retail lending this year to grow 5-10% after frenetic growth in the last couple of years. Chanda Kochhar, joint managing director and chief financial officer, ICICI Bank, said corporate credit growth will do better at 16%. But she denied higher interest rates will have an impact on the bank’s loan portfolio. “Business growth for the industry may be impacted, but not ICICI’s loan quality,” Kochhar said. The bank’s net non-performing assets have increased to 1.74% of total assets in the quarter ended June 2008 from 1.33% in the same period earlier.

Analysts say bad loans will be a major challenge for domestic banks even as regulators prepare to ease restrictions on foreign banks operating in India in 2009. “We will have to go through some pain because the right processes were not followed earlier and it may impact the industry. For example, financing for white goods has more or less stopped. Now, if electronic goods are not sold, their makers face losses because they have invested a lot in producing the goods,” said Ravi Trivedy, executive director, business advisory services, at KPMG, the audit giant and consultant.

Trivedy added,. “Reserve Bank of India has no choice but to hike rates if inflation is at 12% and that will be a problem because if people have taken a loan of Rs 50 lakhs and paying 7% interest two years ago, now they are paying 14% which means paying double the interest now,” he said. But Trivedy said the number of people defaulting on their home loans in India will be less because, unlike the US, the home-loans market in India is a “user’s market.”

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