The Pattern #134

Stressed out! Indian lenders must brace for another storm

Mayank Jain

Head - Marketing and Content

·

Jul 25, 2025

Hi everyone,  

Welcome to the 164th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started!  

Time flies, so did the first quarter of FY 25-26. 

This quarter was expected to show an upward trend in the performance of the credit industry. Although credit demand increased moderately, a June repo rate cut promised a change in wind direction, and the RBI was celebrating a 4.3% increase in its Financial Inclusion Index. On paper, it looked like lenders were in for a smooth ride. 

Except Q1 FY26 turned out to be a little… off script. 

The reality check 

Let's start with the crack in the façade. According to a joint report by industry association Assocham and CareEdge, affordable housing finance is expected to show signs of stress this FY. The numbers make that clear: gross NPAs are projected to rise from 1.4% to 1.6%. Credit costs, once at 0.3%, are now edging up to 0.4%. 

What's driving this? 

The two familiar forces 

First, borrower profiles have shifted. Self-employed borrowers and first-time home buyers rely on affordable housing finance. But their income streams are uneven, and their cash flow is bumpy. A minor disruption can snowball into delinquency, forcing lenders to build bigger provisioning cushions.  

This is largely due to the fact that a lot of self-employed individuals suffer from seasonal cycles or economic downturns and the impact for them is worse than, say, the white-collar workers.  

For instance, travel businesses might prosper during certain times of the year but languish in others and thus, the relative burden of the same home loan EMI might be felt much more sharply during the lean periods.  

Second, the seasoning effect. Loans disbursed during the recent growth wave begin to fade from their honeymoon phase, revealing underlying risks. Books that initially appeared clean are starting to show signs of slippage as repayment behaviour comes under pressure. If the macroeconomic conditions worsen, some borrowers may lose their jobs, face business losses, or encounter unforeseen expenses. 

The report mentioned, "improvement in the seasoning of the loan book will lead to some natural elevation in delinquencies. Policy initiatives, such as interest subsidies, will provide a fillip for the sector. However, higher delinquencies are visible for HFCs with a higher composition of self-employed borrowers". 

For the broader picture, this quarterly hiccup can serve as a warning, highlighting the delicate balance between inclusion and sustainability. Extending credit to new-to-credit customers is essential for India's development goals. However, doing so without robust risk management is risky for lenders, investors, and even the customers whose inclusion is intended to serve. 

Growth has not all dried up. AUM is still expected to rise by 23% this year, slightly below the 25% increase seen in the previous year. But now, every extra rupee lent carries more risk and costs more to safeguard. 

The other side of the story 

Interestingly, prime housing financiers tell a different story. Their AUM growth is estimated to improve to 12.1% from 10.6%, and gross NPAs are likely to decline to 1.6% from 1.7%. Stronger and low-risk borrower profiles seem to be cushioning the blow—a lesson for others in the segment. 

If this trend continues, things may become difficult for NTC, self-employed or thin-file borrowers. This could result in stricter documentation and tighter monitoring, which will eventually slow loan approvals in the short term. 

The bigger picture remains positive. India's housing demand remains strong, and the aspiration for homeownership continues to drive growth. And to do that, profitability and prudence must sit in parallel with every lender's strategy. 

A strong caution 

Here's where it gets nuanced. RBI's Financial Inclusion Index rose 4.3% in FY25, signalling progress in access, usage, and quality of financial services. That's good news for policymakers and an important social goal.  

But inclusion does not automatically translate into healthy books. Expanding into underserved, riskier segments without equally strong risk controls invites trouble. Affordable housing isn't the only case study. Take retail credit.  

India's credit card industry experienced a slowdown in June 2025. Major issuers, including ICICI Bank, Kotak Mahindra Bank, and RBL Bank, reported sharp declines in new card additions. At the same time, overall spending slipped to a four-month low of ₹1.83 lakh crore. Growth remains positive compared to last year, but not as robust as anticipated. This moderate pace suggests a deeper issue: lenders are tightening credit to protect quality. 

It’s not just the banks. Industry bellwether for retail lending – Bajaj Finance – was down 4% intraday on Friday after a concerning conference call where it cautioned investors about possible slippages and worsening asset quality.  

Over-leverage of customers across product segments remains a pain point for the company, it’s vice chairman and managing director Rajeev Jain said in a call recently. He added that the company was taking several actions across product lines to reduce the contribution of customers with multiple loans. 

“That's the single univariate pain point that we have identified, which has a significantly high bearing on loan loss and provisions,” Jain said in the post-earnings analyst call. 

The RBI's inclusion drive is laudable, but it also pushes lenders toward borrower profiles where risk visibility is low, and buffers are thin. 

What happens next? 

The industry needs a new playbook—one that makes risk management as important as growth. That means: 

  • Focusing on sharper underwriting for self-employed and informal sector borrowers. 

  • Building early-warning systems to catch stress before it turns into delinquency. 

  • Creating provisioning cushions that anticipate potential volatility in asset quality. 

The Takeaway 

India's housing demand graph will continue to rise, and the aspiration for home ownership will continue to drive credit growth. But Q1 proves that inclusion cannot be built on weak foundations.  

This quarter's lesson is straightforward: growth remains the goal, but growth with discipline is the only way forward. The coming quarters will reveal who adapts and who learns some hard lessons about what irrational exuberance really means. 

That's a wrap for this week! I’ll see you again next week. As always, leaving you with a few reads to explore. Have a great weekend! 

Reading List: 

  1. Banks need to build resilience against cyber threat: DFS Secretary 

  2. Private banks' yields on advances dip on faster rate transmission 

  3. Banks rush for VRR amid call rate spike 

  4. India needs USD 1.5 trillion investment across key sectors to address climate challenge: Report 

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

Cheers, 

Mayank 


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