Retail, agri & MSME loans to deepen banks' stress

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26 Aug, 2025 12:21

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Banks, already swamped with large corporate bad loans, are now facing a new threat.

The first quarter results of this fiscal year has opened a can of new worms: retail, agriculture and MSME (micro, small and medium sector enterprise) bad loans.

After the Reserve Bank of India’s regulatory dispensation of three months post demonetisation and the farm loan waivers announced in five states, banks witnessed defaults emerging from these new segments.

Over 30 banks, which have already reported their first quarter earnings, have recorded an increase of nearly Rs 45,000 crore in their gross non-performing assets (NPAs).

“Retail is the only book which is growing so banks will continue to lend in the secured retail i.e. mortgage loans or other home loans. But under the garb of retail loans, public sector banks (PSBs) have extended walk-in loans to a lot of SMEs. There is a difference in the way they approach loans (as compared to private banks). Here is the need to go on the ground and assess the inventory or equipment they are building. So, there could be some lacunae we suspect. So it needs to be seen, how much will it help the PSBs to move beyond their core strengths,” Abhishek Bhattacharya, Director, Financial Institutions at India Ratings and Research.

Country’s biggest bank State Bank of India (SBI), during its results announcement on Friday, said that Rs 17,886 crore out of the Rs 24,249 crore worth of loans that slipped into the bad loan category during the quarter were from the retail, agriculture and SME segments.

It explained that about 40 percent of these slippages came from the bank’s agriculture loan book while 35 percent came from SME loans and 14 percent came from low-risk housing loans.

In cases where a borrowers’ farm loan had slipped into the NPA category, repayments on home loans became overdue as well, the bank’s management said in a post results conference call.

Some part of this will be recovered after states make good on payments due for waived farm loans, said SBI’s Rajnish Kumar, Managing Director of the national banking group.

"We should get about Rs 3,000 crore from states within two months for payments against the farm loan waivers. We are certain that the slippages can be cleared," Kumar said. He added that the bad loans in the SME segment grew because of the Reserve Bank's 90-day relief given to small borrowers for repayments to tide over the cash crunch that followed demonetisation announced on November 8, 2016.

At the end of the June quarter, SBI reported its total bad loans at Rs 1.88 lakh crore, accounting for nearly 10 percent of the bank’s total loan book. Of this, 18 percent of its corporate loan book turned into NPA. The NPAs from SME and agriculture segment stood at 12 percent and 9 percent, respectively.

Similarly, Bank of Baroda said of nearly Rs 4,200 crore slippages, Rs 868 crore came from agriculture, Rs 1,050 crore came from MSME and Rs 369 crore came from retail portfolio. The total slippages of the three portfolios is more than the corporate slippages at Rs 1909 crore.

Bhattacharya also said that private sector banks have more rational growth. "Most of their lending, say about 60-70 percent, is to their own customers or have other relationships with their banks. PSBs as long as they are doing mortgages is fine, but growth slightly beyond their comfort looks difficult. Though there are no red flags in the private banks growth in PSBs is slightly higher than our comfort zone...However, there may not be a retail bubble."

Among top private sector banks, HDFC Bank and Axis Bank also saw a rise in agriculture loans with HDFC Bank’s 60 percent and half of Axis Bank’s rise in its incremental NPAs coming from the agriculture sector.

Other public sector banks including Union Bank of India, UCO Bank and new private section lenders such as Bandhan Bank and Ujjivan Small Finance Bank also reported delinquencies in their loan repayments resulting in higher NPAs due to the farm waivers.

In addition, SBI has also got cautious in its lending to the Ola and Uber cab drivers due to their lowering income and hence increase in defaults.

In retail loans, Bhattacharya added that there is risk adjusted pricing, as typically in personal and credit card loans, they have 5-6 percent secured loss priced in. So despite a spike in delinquencies, the margins may not contract as much.