UBS Securities Red Flags Retail Loans, Credit Costs Soar By 200 Basis Points

(CTN News) – It has been noted that there is an increase in UBS default risks among retail unsecured loans of banks, which can be expected to result in a 50-200 basis point increase in credit losses, according to one analyst.

Over the weekend, UBS Securities sent a note to clients informing them that there is a high risk of regulatory tightening in the future.

MUMBAI: A foreign brokerage has issued a warning to banks that there is a significant risk of banks defaulting on retail unsecured loans, shortly after the Reserve Bank of India took the unprecedented step of warning banks about their ballooning retail book.

It has been suggested by a Swiss brokerage firm, UBS Securities, that the rise in default risk in retail unsecured loans of banks will likely lead to a rise in their credit losses over the next few years of 50-200 basis points due to the increase in default risk on these loans.

On October 8, the Reserve Bank sent out a stern warning to banks regarding the ballooning amount of unsecured retail loans that they were taking on.

It has been the norm for banks for many years to rely heavily on their retail books as corporate demand remains anemic.

Retail loans at the system level, according to the central bank, have grown by an average of 30 per cent over the past three years, whereas other loans have only grown by a third of that amount.

UBS Securities said in a weekend note that they see increasing default risks in retail unsecured loans of banks, which is likely to increase their credit losses by 50-200 basis points. In our opinion, the risk of regulatory tightening is high,” the bank said.

This has resulted in us turning neutral on Indian banks, and downgrading State Bank of India, Kotak Bank of India and UBS Axis Bank of India to a sell rating as a result,” the note noted.
There is nothing unusual about rapid loan growth being followed by a rise in defaults, according to analysts with the brokerage firm where the loans were originated.

As well as this, the growing number of personal loans being disbursed to borrowers with weaker credit profiles (which can amount to as much as 22 percent of disbursements) exposes this segment of the market to potential downturns as well.

The share of weak personal loan borrowers among NBFCs and state-run banks is higher than the share of weak borrowers among large private banks.

According to the latest data from the UBS  Reserve Bank of India, the percentage of unsecure loans as a percentage of total loans rose to 11.1 per cent for SBI, 12.8% for ICICI Bank and 10.7 per cent for Axis Bank, but it fell to 11.9 per cent for HDFC Bank after its merger with the patent in July 2023.

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