Private banks account for 52.6% of NPAs in unsecured retail loans

Gross NPAs of private banks in unsecured loans was below 50 per cent two years ago.

In a recent revelation from the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) for June 2025, private sector banks in India account for a staggering 52.6% of gross non-performing assets (NPAs) in unsecured retail loans as of March 2025. This marks a significant increase from two years ago when their share was below 50%. In contrast, public sector banks (PSBs) hold a 40.5% share of NPAs in this segment. This growing concentration of bad loans in private banks’ unsecured portfolios—encompassing credit cards, personal loans, and education loans—raises critical concerns about risk management, lending practices, and the broader health of India’s banking sector. This article delves into the causes, implications, and potential solutions to this emerging challenge.

Understanding Unsecured Retail Loans and NPAs

Unsecured retail loans are credit facilities extended without collateral, meaning banks rely solely on the borrower’s creditworthiness for repayment. These loans, including credit cards, personal loans, and education loans, are attractive to banks due to their higher interest rates and growing demand, particularly among younger, digitally savvy consumers. However, their lack of collateral makes them inherently riskier, as recovery becomes challenging when borrowers default.

A non-performing asset (NPA) is a loan or advance where the borrower has failed to make principal or interest payments for at least 90 days. The gross NPA (GNPA) ratio for unsecured retail loans stood at 1.8% in March 2025, higher than the 1.2% for the overall retail portfolio, signaling a relative deterioration in asset quality. Private banks, which have aggressively expanded their unsecured lending in recent years, are now facing the consequences of elevated slippages—loans turning non-performing—dominating the retail segment’s overall slippage.

Why Private Banks Are Hit Hard

Several factors contribute to private banks’ disproportionate share of NPAs in unsecured retail loans:

1. Aggressive Lending Post-Pandemic: Post-COVID-19, private banks shifted focus to retail lending, particularly unsecured loans, to capitalize on rising consumer demand and higher interest margins. Unsecured retail loans now constitute 25% of total retail loans and 8.3% of gross advances, reflecting their growing prominence. This aggressive push, however, has led to lax underwriting standards in some cases, increasing the risk of defaults.
2. Rise of Digital Lending Platforms: The proliferation of instant loan apps and digital lending platforms has fueled unsecured credit growth. These platforms, often operated or partnered with private banks, target younger borrowers with quick, hassle-free loans. However, this has led to over-leveraging, with many borrowers falling into debt traps, especially in small-ticket loans below ₹50,000, where delinquency rates are high.
3. Borrower Over-Leveraging: The RBI’s FSR notes that nearly half of borrowers with credit cards or personal loans also have other substantial retail loans, such as housing or vehicle loans. Defaults on smaller unsecured loans can trigger delinquency risks for larger, secured loans, amplifying the NPA problem.
4. Economic and Behavioral Factors: Rising household debt, which reached 42.1% of GDP by December 2024, reflects increased reliance on consumption-led borrowing, particularly among sub-prime borrowers. Economic slowdowns, job losses, or unexpected expenses can exacerbate repayment challenges, especially for unsecured loans with higher interest rates.
5. Write-Offs as a Coping Mechanism: Private banks have increasingly relied on write-offs to manage NPAs, particularly in unsecured portfolios. While this reduces reported NPAs, it masks underlying stress and impacts profitability. The RBI’s FSR highlights write-offs as a key factor in NPA reduction, but this is a short-term fix that doesn’t address root causes.

Comparative Analysis: Private vs. Public Sector Banks

While private banks account for 52.6% of NPAs in unsecured retail loans, PSBs hold a 40.5% share despite their larger overall loan portfolios. This disparity stems from differences in lending strategies and risk management:

• Conservative Approach by PSBs: Public sector banks have traditionally been more cautious in retail lending, focusing on secured loans like housing and vehicle loans. Their lower exposure to unsecured loans (6.3% of total bank credit compared to 16.6% for private banks) has shielded them from the same level of stress.
• Provisioning Strength: PSBs maintain high provision coverage ratios (PCRs) of 75-80%, supported by lower incremental slippages. Private banks, with PCRs around 74%, face higher credit costs due to increased slippages in unsecured loans, impacting their profitability.
• HDFC Bank’s Exception: Among private banks, HDFC Bank stands out for its resilience, having slowed its unsecured lending growth 6-9 months before RBI’s regulatory tightening in November 2023. This proactive approach, driven by early warning signals, has kept its NPA levels stable, unlike peers like Axis Bank, Kotak Mahindra Bank, and RBL Bank, which reported significant slippages in Q2FY25.

Implications for the Banking Sector

The high NPA share in private banks’ unsecured portfolios has far-reaching implications:

1. Profitability Pressure: Elevated slippages and write-offs increase credit costs, eroding profits. For instance, Axis Bank reported gross slippages of ₹4,443 crore in Q2FY25, with ₹3,100 crore written off, primarily from unsecured loans. This trend could strain private banks’ earnings, especially as credit costs are expected to normalize after bottoming out at 0.41% in FY25.
2. Regulatory Scrutiny: The RBI has flagged rising delinquency levels, particularly in small-ticket personal loans, prompting stricter measures. In November 2023, the RBI increased risk weights on unsecured retail loans by 25 basis points to curb excessive lending. Continued stress could lead to further regulatory interventions, impacting credit growth.
3. Systemic Risk: While the overall banking sector’s GNPA ratio hit a 12-year low of 2.3% in FY25, stress in unsecured loans could push it to 2.3-2.4% by FY26. If unchecked, this could spill over to secured loan portfolios, as defaults on unsecured loans often signal broader financial distress among borrowers.
4. Investor Confidence: Rising NPAs in a high-growth segment like unsecured retail loans could dent investor confidence in private banks, as seen with RBL Bank’s 14.21% share price drop after reporting increased slippages in Q2FY25.

Case Studies: Private Banks in Focus

• Axis Bank: The bank reported significant stress in its unsecured portfolio, with gross slippages of ₹4,443 crore in Q2FY25, largely from credit cards and personal loans. Its aggressive provisioning and write-offs reflect efforts to manage NPAs, but the underlying stress remains a concern.
• Kotak Mahindra Bank: Facing rising credit costs, Kotak reported increased slippages in its unsecured portfolio, particularly in credit cards and microfinance loans. The bank has expressed caution about future asset quality trends.
• RBL Bank: RBL’s share price hit a 52-week low after reporting elevated NPAs in unsecured loans, underscoring the vulnerability of smaller private banks with concentrated retail portfolios.
• HDFC Bank: By contrast, HDFC Bank’s proactive calibration of its unsecured lending has insulated it from industry-wide stress, highlighting the importance of robust risk management.

Broader Economic Context

India’s banking sector has made remarkable strides since the 2015 asset quality review (AQR), which exposed a massive NPA crisis with gross NPAs peaking at 11.2% in FY18. The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 and subsequent recovery mechanisms helped banks recover ₹3.9 lakh crore across 1,194 cases by March 2025. However, the shift to retail lending, particularly unsecured loans, has introduced new risks. Rising household debt, coupled with economic uncertainties like global trade disruptions and slower growth (IMF projects 6.5% for CY 2025), could exacerbate repayment challenges.

Solutions and the Way Forward

To address the rising NPA stress in unsecured retail loans, private banks and regulators can consider the following measures:

1. Strengthening Underwriting Standards: Banks must adopt stricter credit assessment processes, including higher CIBIL score thresholds and better debt-to-income ratio evaluations, to prevent over-leveraging.
2. Enhancing Transparency: Fitch Ratings has flagged the lack of transparency in Indian banks’ retail lending data, such as loan-to-value ratios and borrower credit scores. Improved disclosure could help investors and regulators better assess risks.
3. Leveraging Technology: Advanced analytics and AI can help banks identify early warning signals of potential defaults, as demonstrated by HDFC Bank’s success.
4. Regulatory Oversight: The RBI’s proactive measures, such as increased risk weights, should be complemented by regular stress tests and stricter monitoring of digital lending platforms to curb predatory practices.
5. Borrower Education: Raising awareness about responsible borrowing, especially among young and sub-prime borrowers, can reduce over-leveraging and debt traps.
6. Diversifying Portfolios: Private banks should balance their focus on unsecured loans with secured lending to mitigate risk concentration.

Sources

• Reserve Bank of India, Financial Stability Report, June 2025
• NDTV Profit, “Private Banks Face Rising Stress in Unsecured Retail Loans As NPAs Climb,” June 30, 2025
• The Financial Express, “Rising share of unsecured loans in NPAs a worry,” February 1, 2025
• Business Standard, “Private banks see elevated slippages from unsecured loans in Q2FY25,” October 21, 2024
• Policy Circle, “Looming NPA crisis: Unsecured loans threaten India’s private banks,” October 23, 2024
• ET BFSI, “Gross Non-Performing Assets (GNPA): India’s Banking Sector Sees Improvement in NPAs but Faces Retail Loan Stress Ahead,” June 16, 2025
• Times of India, “Once weighed down by bad loans, public sector banks drive India’s banking profits to highest ever in history,” May 29, 2025