The rising proportion of unsecured loans, increasing exposure to high-risk customers, spiralling interest rates and a decline in credit standards from 2004 to 2007 will result in more bad debt for the Indian banking sector, rating agency Crisil has said.

In a new report, the agency said the gross non-performing assets for the sector will rise to around 4 per cent on an asset size of over Rs 5,50,000 crore by March 2009, as against 2.7 per cent at the end of March 31, 2007. The rise in bad debt will translate into more losses for lenders.

Crisil, however, expects the situation to be manageable as the less risky mortgage loans and vehicle loan segments continue to dominate the retail lending portfolio of lenders, with an 80 per cent share of the total loan outstanding. Further, rising personal incomes and younger borrower profiles provide a cushion in the mortgage loan segment.

The increasing exposure to higher risk customers is mainly through personal loans and credit card receivables, which are unsecured in nature and formed 17 per cent of the total outstanding retail loans in March 2007 compared to 6 per cent in 2004.

The agency estimates the loss levels in the sub-prime segment comprising small-ticket personal loans and a portion of credit card receivables from low-income customers, will increase to 10-13 per cent over the medium-term from the current 7-9 per cent. Housing loans constitute over half the retail loan portfolio in India.

Gross NPAs in the home loan market rose to 2.2 per cent in March 2007 from 1.8 per cent in 2005 and is expected to increase to 2.7 per cent during 2008-09. The car and commercial vehicle asset segments comprise one-third of the total retail loans.

Crisil said the gross NPAs in car and commercial vehicles business segments increased to 2.3 per cent and 4 per cent respectively at the end of March 2007. In 2008-09, these numbers are seen at 3 per cent for car loans and 5.5 per cent for commercial vehicles.

The difficulty in loan recovery may compel some players to exit the small-ticket personal loan segment, which has been affected the most. The exit of players could drive lower income borrowers to the money lenders, which will be detrimental to the policy goal of seeking larger financial inclusion. Another outcome of the intense publicity surrounding recovery methods could be an increase in wilful defaults by borrowers.