- Private banks erased ₹12,121 cr in Q3 – a 22% YoY rise.
- Headline NPA ratios look calm, but underlying slippages are creeping up.
- Retail and unsecured loan portfolios are the new stress points.
- Historical cycles show write‑off spikes often precede tighter credit and lower earnings.
- Bull and bear cases hinge on how aggressively banks provision versus pursue recovery.
You thought private banks were out of trouble? Think again.
Why Private Banks' Write‑Off Surge Signals Deeper Credit Stress
In the December quarter, the five biggest private sector banks collectively wrote off ₹12,121 cr, up from ₹9,889 cr a year earlier. A write‑off is the accounting recognition that a loan is unlikely to be recovered, effectively removing it from the balance sheet. While the headline non‑performing asset (NPA) ratio stayed modest – a metric that tracks loans classified as overdue for 90 days or more – the underlying slippage figure tells a different story.
Slippages, which capture the total amount of loan arrears that have moved into the stressed bucket during a period, rose slightly to ₹19,048 cr from ₹18,974 cr a year ago. The increase is modest in absolute terms but notable because it signals fresh credit deterioration despite banks’ aggressive provisioning.
How Retail and Unsecured Slippages Are Redefining Risk
Retail credit – personal loans, credit cards, and unsecured consumer financing – accounts for a growing slice of private banks’ loan books. The sector’s slippage rate has risen faster than the corporate side, reflecting heightened consumer debt stress in a high‑inflation environment.
For example, HDFC Bank logged ₹3,520 cr in slippages, largely unchanged from previous quarters, but its write‑offs stayed high at ₹3,200 cr as the bank continues to clean up balance‑sheet items inherited from the recent HDFC‑HDFC Life merger. ICICI Bank’s slippages jumped to ₹5,356 cr, prompting a provisioning increase to ₹2,556 cr – a clear sign that the bank is building a larger safety buffer.
Axis Bank, despite recording the highest absolute slippages (₹6,007 cr), saw a slight decline from its earlier peak, suggesting a possible stabilization, yet the overall trend across the cohort points to persistent stress in unsecured lending.
Historical Write‑Off Patterns: Lessons from Past Cycles
Looking back at the 2018‑2020 period, private banks experienced a similar write‑off surge when the economy entered a slowdown. At that time, write‑offs spiked by roughly 18% YoY, followed by a sharp contraction in new loan growth and a tightening of credit standards. Share prices of the banks fell 12% on average over the next two quarters, only to recover once provisioning levels normalized and asset quality improved.
The key takeaway: write‑off spikes often precede a period of tighter credit, lower earnings, and heightened market volatility. Investors who ignored the 2018 warning saw portfolio erosion, while those who re‑balanced into higher‑quality assets (e.g., government‑linked bonds) preserved capital.
Competitor Landscape: What Public‑Sector and Mid‑Tier Lenders Are Doing
State‑run banks such as SBI and PNB have reported lower write‑off volumes, partly because their loan books are more weighted toward large corporate and government exposure, which historically exhibit lower default rates. However, these banks are beginning to feel the pressure in retail segments as they expand consumer credit.
Mid‑tier private lenders like Kotak Mahindra and IndusInd are also tightening underwriting standards. Kotak’s slippages rose modestly, but its provisioning ratio jumped to 1.9% of advances – the highest among its peers – indicating a proactive approach that could mitigate future shocks.
For investors, the divergence in provisioning and write‑off strategies among banks creates a relative valuation opportunity. Banks that are more aggressive in provisioning may face short‑term profit compression but could emerge with cleaner balance sheets, while those that delay provisions risk a sudden earnings hit later.
Investor Playbook: Bull vs. Bear Cases for Private Banks
Bull Case: Banks that continue to use write‑offs strategically while bolstering provisions will likely see a stabilization of asset quality. Their earnings may be modest in the near term, but a cleaner balance sheet positions them for market share gains when credit growth resumes. Investors could look for banks with a provisioning ratio above 2% of advances as a sign of prudence, and consider adding them at a discount to book value.
Bear Case: If the retail stress deepens – driven by rising unemployment, higher loan‑to‑value ratios, and persistent inflation – slippages could accelerate, forcing banks to accelerate write‑offs and impairments. This scenario would pressure profitability, increase capital requirements, and potentially trigger regulatory scrutiny. In that environment, banks with lower provisioning buffers and higher exposure to unsecured loans become vulnerable.
Actionable steps:
- Monitor quarterly slippage reports – a sequential rise of more than 5% should raise a red flag.
- Compare provisioning ratios to historical averages; a widening gap suggests a more defensive stance.
- Weight portfolio exposure toward banks with diversified loan books and lower retail concentration.
- Consider hedging equity exposure with credit‑linked instruments if macro‑economic data points to further consumer stress.
In short, the 22% write‑off surge is not just an accounting footnote; it’s a signal that credit risk is re‑emerging in India’s private banking sector. Your portfolio’s resilience will depend on how quickly you adjust to the evolving risk landscape.