High retail NPAs a sign of weaker consumption recovery?
On an aggregate basis, NPAs have not risen much. In the March quarter of last year, just before the pandemic started, aggregate NPAs of Scheduled Commercial Banks were 8.3% of Gross Advances. And as of June-2021, NPAs are 7.3%. During the past 5 quarters, NPAs first fell and then have risen in the last two quarters, reflecting the impact of the pandemic as well as regulatory forbearance. But the net result is that aggregate NPAs are thus lower than what they were just before the pandemic started.
However beneath the surface, stress has built up when we look at disaggregated data. First, restructured assets have made a come back and aggregate stressed assets are only slightly (~20bps) below the pre-pandemic level. Secondly, NPAs have risen sharply in Retail sector - driven by almost all categories but particularly credit cards and other personal loans. But the sharp decline in NPAs in the Industrial sector has more than offset this increase.
From the perspective of the broader economy, if this stress in retail loans were to continue, it will eventually weigh on consumer spending – and consensus expectation is for consumption growth to see strong recovery as the economy comes out of the shadows of the pandemic. This thus represents a key counter to the current bullish perspective on the economy and markets.
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