India’s consumers and some conglomerates are on a borrowing spree that is starting to worry regulators and, if left unchecked, could threaten the country’s breakneck economic growth.

On the retail front, an increasing number of Indians are resorting to credit to purchase consumer durables while loan defaults are rising. Meanwhile, corporate bond issuance surged by 15% to 7.5 trillion rupees ( US$88.8 billion ) in the fiscal year ended April 2024, according to the Reserve Bank of India ( RBI ).

Under a rosy economic outlook, India’s largest corporates are investing a total of US$800 billion in business expansion over the next decade, 3x the amount spent over the last 10 years, notes S&P Global. Although operating cash flow comes first in underpinning this aggressive expansion, followed by equity funding and joint ventures, Indian conglomerates inevitably need to increase their leverage.

Adani Group, which planned to plough US$100 billion into new energy and semiconductors, lacked discretionary cash flow in the last three years, according to S&P Global. Moreover, its net-debt-to-ebitda ratio stood at a high level of 4x in March 2024.

Conglomerates such as Reliance, Adani and Vedanta are also struggling with low liquidity while planning huge investments over the next decade. In general, S&P Global predicts that the leverage-to-ebitda ratio among the largest Indian corporates will rise by 0.5x to 1x.

“Obviously, [new businesses] entail higher risks because they are areas that the group didn’t venture before,” says Neel Gopalakrishnan, director and sector lead of infrastructure ratings at S&P Global, in a recent webinar hosted by the rating agency.

“These risks would need to be carefully managed, especially considering in the past, groups have gone into new businesses, for instance, in the telecom sector, and exited,” he explains. “Given that we expect absolute debt level to rise, it’s very important for core business to consistently strengthen, because if there’s any weakness in the existing business, it would result in a significant increase in leverage.”

Still, the leverage ratio of India's conglomerates has remained stable over the past 10 years despite robust growth. Improving gains in the core business due to higher profitability and a favourable business environment can support new business activities.

Loan-deposit mismatch

While corporate debt levels remain under control, Indian banks find the situation less than ideal. Loan demand is strong, but banks have to contend with the expected deposit growth under the high interest rate environment.  The deposit growth rate equalled the credit growth rate for the first time in almost 30 months in October, but the need for financing across India is still more pronounced throughout 2024.

A report by S&P Global notes that the loans-to-deposits ratio reached 77.3% in June and is predicted to hit 80% at the end of 2024. The gap in the private sector is even worse, according to the rating agency.  

A Fitch Ratings report, meanwhile, highlights the lukewarm appeal of low-cost deposit in India as capital shifts to the equity market. “This trend poses a risk to funding costs, and could render asset-liability management more challenging if banks’ long-term funding does not plug the gap from any migrating deposits,” it warns.

The shortage of deposits doesn’t only eat into a bank’s ability to lend but also dents its net interest margins and liquidity.

According to the RBI’s latest Financial Stability Report, non-performing assets in the banking system hit 2.8% in June, a sharp drop from 11.5% in 2018.

However, the banks’ improving credit quality risks reversal amid rising volatility in the retail lending space.

Rising retail credit defaults

Household borrowings rose by more than 25% in March this year, compared with a year ago, the RBI report says. About a third of the retail loans were obtained by near-prime and sub-prime borrowers.

Credit card and housing loans are the two major drivers of retail loans, increasing at a compound annual growth rate of 18.9% and 21% respectively since 2020, says Mumbai-based analysis firm CareEdge.  Non-bank financial companies ( NBFCs ) and fintech firms have established a strong presence in the prime retail lending space.

In an effort to forestall personal loan default, RBI increased the capital requirement for personal loans to 125% in November last year. The move pre-emptively cushioned the impact of rising retail credit defaults this year. Kotak Mahindra Bank saw gross non-performing assets ( GNPA ) rise 9% during the three months to September, while IndusInd Bank’s GNPA was up 7% and RBL Bank recorded an 8.5% increase. The situation reflects the rising default rate among retail customers.

Bajaj Finance, one of the largest NBFCs in India, notes in its second-quarter report that customers “having three or more live unsecured loans are showing a higher propensity to default and lower collection efficiencies”, which in turn has led to tighter underwriting norms for already indebted customers. Credit card service provider SBI Card also saw its NPA rising to 3.27% of the gross advance from 2.43%.

The precarious retail credit market has led to four NBFCs being barred from offering small loans. The central bank has raised caution over the rising retail loan defaults, hinting that it may take more action to address the situation to prevent it from spreading across the entire banking system.