The asset quality of retail loans is deteriorating, caused by factors such as rising proportion of unsecured loans, increasing exposure to high-risk customers, rising interest rates, and decline in credit standards observed during the strong credit growth period (2004-07), according to rating firm Crisil.

As result, the gross non-performing assets (NPAs) in retail loans are expected to increase to around 4 per cent (of the advances) by March 2009, from 2.7 per cent as on March 31, 2007, it said.

The segments that have been most affected by the decline in asset quality are unsecured segments such as personal loans and credit card receivables, as well as two-wheeler, commercial vehicle (CV) and used car loans. Delinquencies have increased across the retail portfolios of banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs), and are set to increase further in 2008-09.

Gross NPAs in housing loans -- which constitute more than half of the total retail loans -- increased to 2.2 per cent in March 2007 from 1.8 per cent in 2005. These are expected to increase to 2.7 per cent in 2008-09. Over 70 per cent of the loans have been taken for self occupancy resulting in a lower expectation of delinquency, it said.

Car and CV assets comprise a third of the total retail loans. Crisil estimates that gross NPAs in car loans have increased to 2.3 per cent as on March 31, 2007 from 0.9 per cent as on March 31, 2005.

The gross NPAs may increase further to 3 per cent in 2008-09 on account of the increasing proportion of used car loans, which have inherently weaker customer profiles. Rising operating costs in the road transport sectors has put pressure on the margins of transport operators, and has resulted in higher delinquencies in the CV segment. Gross NPAs in the CV segment will increase to 5.5 per cent in 2008-09 from 4 per cent as on March 31, 2007.