Indian Banks Face Rising Defaults from Over-Leveraged Retail Borrowers
A surge in defaults by over-leveraged retail borrowers is impacting major Indian banks such as HDFC Bank, Kotak Mahindra Bank, and IndusInd Bank, raising concerns over asset quality in personal loan and micro-credit segments. According to a report from Reuters on October 29, 2024, bank executives and analysts anticipate this trend could persist through the coming year.
Key Highlights:
• Credit Cycle Shift: Loan defaults indicate a turning point in the Indian credit cycle, with bad loans, or non-performing assets (NPAs), having previously dropped to a record low of 2.8% of all assets by March 2024, per Reserve Bank of India (RBI) data.
• Rising Bad Loans: As of September, five of the eight largest private banks—HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, RBL Bank, and IDFC First Bank—reported an increase in gross bad loans by 2 to 19 basis points.
• Provisions Set Aside: Many banks have raised their provisions (funds reserved for expected loan defaults), highlighting a conservative approach in light of anticipated stresses.
Personal Loans and Credit Cards Under Pressure
• Growth in Personal Loans and Credit Card Debt: Both segments saw rapid growth of over 25% earlier this year, which prompted the RBI to curb retail lending. Bernstein analyst Pranav Gundlapalle predicts elevated slippages (good loans turning bad) may persist “for the next 3-4 quarters” due to these segments.
• Capital Requirements: Increased capital requirements imposed last year, along with regulatory actions against aggressive lending, have already slowed growth in personal loans and credit card debt, impacting overall profitability projections for banks.
• Asset Quality and Profitability Concerns: Analysts caution that while many banks are well-capitalized, the ongoing increase in bad loans and slowdown in retail loan growth could weigh on profitability.

Indebtedness Concerns and Over-Leveraging
• Rising Stress in Unsecured Loans: According to Arjun Chowdhry, group executive at Axis Bank, stress is evident in multiple unsecured loan segments due to “over-leveraging.” Excessive indebtedness is causing widespread strain, particularly in unsecured personal loans.
• Bajaj Finance Observations: Rajeev Jain, MD of Bajaj Finance, noted that borrowers with three or more personal loans show the highest loan default risk, driven by intense competition among lenders to capture market share.
• Case Study: One example shared is Harpal Singh, a 45-year-old resident of Mumbai with an annual income of ₹7.8 lakh, who has accumulated ₹50 lakh in personal loans and credit card debt over six years. Singh’s situation underscores the challenges faced by many borrowers amid high costs of living and unforeseen medical expenses.
Rising Defaults in Microfinance Loans
• Microfinance Sector: Default rates are also up in the microfinance sector, which serves low-income borrowers. Climate-related disruptions affecting crops in rural areas have impacted borrowers’ ability to repay, as highlighted by a state-run bank official.
• RBI Regulatory Action: In response to rising risks, the RBI has banned four non-banking lenders from issuing fresh loans due to “usurious” pricing and has requested loan spread data from microfinance companies. Learn more about RBI’s stance on microfinance regulations