Banks hit by unsecured loans bouncer

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Indian Banks have performed well in recent quarter, their net interest margins and asset quality have improved and credit growth is encouraging.

Banks have been facing problems in US, Europe and Indian banks were throught to be safe from any such concerns but that might not be true. In all the places it’s not a sectoral issue but the problems at the company level. In the US there was an asset liability mismatch that impacted the SVB.  In Europe, it was mainly a corporate governance issue for a long time that hampered Credit Suisse. However, this led to a contagion effect in the market and also in the economy as in the US money flew from small banks to large banks.

The RBI released a report where it stated that the maximum number of frauds occurred in FY23. It was reported that there were 13,530 frauds in FY23. Out of them, digital payment frauds accounted for 49%. This includes the card/digital payment category. Interestingly, the maximum number of frauds have occurred in private banks while in terms of value public sectors bank led. Although in value terms, the total amount of bank frauds has fallen 49% in 2022-23 as compared to 2021-22. The report added that small value card/internet frauds have the maximum contribution in a number of frauds by private sector banks, while it was loan portfolio that mainly dominated public sector bank fraud.

Besides this Finance Ministry has asked Public Sector Banks (PSBs) to make one-time settlements on low-value loans. This is done so that the burden on debt recovery tribunals (DRTs) can be reduced.

All this is going to impact the banking sector and broader economy. We are seeing a K-shaped recovery where people of lower and middle-income groups are not spending much. Now, the situation is stabilizing, interest rates have normalised and people may start borrowing more for spending. With digitisation, customers find taking loans and making payments easier.

At the same time, banks are modernising themselves using ML, Artificial Intelligence to assess the creditworthiness of borrowers. This will help in expanding the reach of banks. However, issues with unsecured loans may lead banks to take 2 actions. They might go for better scrutiny to prevent fraud and better mechanisms around all this. Which would help banks in the long run. However, until banks do that it is possible they might reduce lending in these categories which can hamper the credit growth and also consumption story.

Another possible impact of this is, customers might move to NBFCs or payment apps which can be a concern to financial stability. These shadow banks are not considered as ethical and stable as banks. So banks need to improve their system and that also quickly. It seems RBI is also concerned about all these points as RBI asked public and private banks to work on issues regarding governance.