Hi everyone,  

Welcome to the 138th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. I hope you had a fantastic new year.  

Let’s get started with 2025’s first Pattern edition and see what’s in store for us. 

Are we starting on a high note?  

As we enter the new year, it’s important to remind ourselves of the uncomfortable things from the past year that we must tackle this year. In the last quarter, credit growth has slowed noticeably, dropping to 11.8% in November 2024, compared to a stronger 16.5% during the same time last year. 

The slowdown is really hitting hard at the unsecured loans segment such as personal loans and credit cards hard. Because of that, these areas are seeing some big declines. For instance, personal loan growth has dropped to 16.3% from 18.7% last year, and credit card growth has fallen to 18.1% , down from a hefty 34.2% in the same period. 

As we dig deeper, the narratives take a darker turn. Small borrowers are facing the crunch more as their budgets get impacted and EMIs continue to pile up. The RBI's latest data reveals that many borrowers with smaller personal loans—under ₹50,000 —are already grappling with overdue. Alarmingly, over 60% of these borrowers took out more than three loans in FY25.  

The RBI highlighted that India’s household debt is about 43% of GDP , which is still lower than other emerging markets. However, it has been steadily increasing over the last three years.  

The rise in household debt is due to more people taking loans than individuals borrowing from the informal sector. What's interesting is how differently people use credit based on their financial profiles. While many subprime borrowers are seeking credit for everyday spending, others are still leveraging credit to invest in high-value assets like real estate and housing.  

Now, to tackle these issues, RBI had to keep a foot down and make some tough decisions. From April, banks will need to increase their capital reserves by 5% due to the Expected Credit Loss (ECL) guidelines. This step will be taken to strengthen the financial system's resilience. However, if we look closely, they are likely to constrain credit growth further as banks adjust to the stricter norms.   

The RBI has also tightened credit card and personal loan regulations to curb risky lending practices. The central bank has also imposed stricter oversight on non-compliant lenders. Plus, banks will need to increase their liquidity coverage ratio by 5%, which will further influence the credit environment.  

While these changes are all about making the financial system safer and keeping depositors protected, they could lead to tighter liquidity and a bit of a slowdown in credit growth.   

Will the ride be bumpy throughout?  

Despite these obstructions, there's a hint of a silver lining. If we look at RBI's latest Financial Stability Report (FSR), we can see that India's financial institutions are well-prepared to navigate its scenarios.  

The central bank's stress tests show that banks and non-banking financial companies (NBFCs) are likely to maintain capital levels significantly above regulatory minimums even under severe stress. The capital to risk-weighted assets ratio (CRAR) for scheduled commercial banks was 16.6% in September 2024. Under normal conditions, it is expected to dip slightly to 16.5% by March 2026.  

Similarly, NBFCs are going strong, with their overall CRAR expected to stay well above the required 15% in all situations, even when things get risky.   

Having said that, banks need to be careful when it comes to gross non-performing assets. The GNPA ratio shows there are some bumps ahead. For scheduled commercial banks, it’s expected to go up from 2.6% in September 2024 to 3% by March 2026 under normal conditions. In a worst-case scenario, it could climb as high as 5.3%.

NBFCs face a similar trajectory. GNPA is projected to shoot from 2.9% to 3.4% under baseline conditions and up to 6% in high-risk scenarios. This indicates that the financial sector can handle all sorts of challenges that come its way, no matter how unpredictable things get. 

Moving forward, it's not just about relying on banks' and NBFCs' substantial capital reserves. Financial institutions also need to focus on smarter loan underwriting processes, better understand borrowers' ability to repay, and strike the right balance between managing risks and driving growth.

Yes, the challenges are real, and the hurdles are high but calm seas never made a great sailor. 

Reading list:  

1. UPI transactions rises 8 pc to 16.73 bn in December: NPCI data

2. Money gaming sees its first big casualty; New Year to be critical

3. Digital lenders disburse 3 crore loans worth Rs 37,000 crore in Q2FY25: FACE

4. AI's spread in the financial system not without dangers

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates. 

Cheers, 

Mayank  

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.