Retail Credit Boom Amid Covid: Signs of Trouble?

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Retail loans or loans to individuals could soon become the largest segment of the Indian loan market, taking the top spot from industrial loans. The share of retail credit had gradually increased and the pandemic accelerated its adoption. This is in part the result of the current weak lending industry and in part the growing habit of individuals to borrow to fund both essential and non-essential needs.

In March 2012, retail lending represented around 18% of total outstanding loans with Indian banks. By March 2021, this had risen to 29%. In comparison, the share of loans to industrial companies of all sizes has fallen from 45% to 30%. Retail loans grew at a cumulative annual rate of 15.5% over the period compared to 4.5% for industrial loans. The rebalancing accelerated after 2015 as retail lending held its pace while the growth rate of industrial lending fell below 2%, data from the Reserve Bank of India (RBI) showed.

During the Covid-19 pandemic, only two of the four main borrower segments managed to borrow more from banks than they used to, the data showed. The retail segment is one and the other is agriculture and related activities. Lending to the service sector and industry declined during the pandemic.

A breakdown of where the growth in retail lending is coming from carries some cautionary notes, particularly related to the pandemic that is putting households in financial trouble. For example, gold jewelry and unsecured personal loans, particularly small loans, have increased. These are emergency loans that are more expensive for private individuals – and riskier for banks.

Distress signals?

Individuals borrow to purchase assets such as B. a house, where the asset provides a safety net against failure. But they also borrow to fund deficits, and this is where the roots of problems for both borrowers and lenders lie. Over the past decade, home loans have held their 50% share of retail loans. But there are three notable changes. First, education loans have lost their share. Second, loans for gold soared during the pandemic. Third, personal loans that may not be collateralized have increased from 18% to 28%.

Personal loans are a rapidly growing segment, including among non-bank lenders. According to a 2021 report by TransUnion CIBIL and Google, 69% of personal loans in 2020 were taken out by people under the age of 30. In addition, small loans are experiencing brisk growth. Between March 2019 and March 2021, the number of accounts that borrow is up to 25,000 from banks rose 75%, versus 31% growth among borrowers 25,000 and 10 lakh.

Public push

Both private and state banks are seeing the shift from industrial to retail. At the state banks, however, the shift is more pronounced. The industrial share of their loan book fell from 41% in June 2017 to 30% in March 2021, while the retail share rose from 20% to 26%. At private banks, retail banking accounted for 29% of their loan book in March 2021.

One consumer segment where government banks have overtaken private banks is personal loans, according to a December 2020 personal loan report by CRIF High Mark Credit Information Services, a credit bureau, while non-banking finance firms (NBFCs) and fintech players are brisk with small loans In terms of volume, banks are leaders in terms of value. In March 2020, state banks had 39% of personal loans and private banks 38%. While private banks kept their stake, state banks increased their stake to 42% in August 2020.

Pandemic debt

The rise in personal lending increases debt pressures on Indian households. This is not bad if the debts are used productively (for example for a purchase of assets or an education that brings future income) and repaid. The total financial debt of Indian households as a share of gross domestic product (GDP) rose from 26% in June 2015 to 38% in December 2020. That figure is 80% for the US and 62% for China, according to data from the Bank for International Settlements (BIS), an association of central banks.

What may worry Indian banks is the rate at which this ratio is increasing during the pandemic. The quarters of June 2020 and September 2020 recorded the strongest increase in this rate in the last 10 quarters.

Given the pandemic and the fact that gold loans and unsecured personal loans are fueling the surge in retail, defaults could hurt individuals and banks in the coming quarters.

(howindialives.com is a database and search engine for public data)

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