Chart of the Day: Watch subprime loans closely in PSBs

Public sector banks (PSB) have been conservative when it comes to retail lending and most bank managements have indicated that they pursue individuals that have linkage to the government. The experience of the previous bad loan cycle has made lenders more cautious. One data point that seems to believe this is the proportion of subprime loans in government owned lenders. Subprime loans are those where borrowers are high risk and have low credit scores. The Reserve Bank of India’s financial stability report shows that one-third of the borrowers of PSBs were subprime, the highest in the industry. Private sector banks had only 16 percent of their customers in subprime category. Even non-bank finance companies had a slightly lower proportion as 28.9 percent of their borrowers were high risk. If we add borrowers of near prime category where credit score is below 730, the ratio goes to 56 percent for PSBs. Near prime borrowers are better than subprime but still relatively riskier than others. Banks are most comfortable to lend to customers that belong to the category of prime and above with high credit scores. To be sure, retail loans are small in size and most subprime loans are found in unsecured personal loans. To that extent, high proportion of subprime customers may not hurt banks. That said, it helps to track fresh stress points for the banking industry.