It is 1992. A college-going Neha dreams of getting an MBA from a reputed college. But a quick reality check sends her dream crashing down – her parents’ income would not be sufficient to keep up with the education expense the same might entail.
It is 2002. Neha visits her ambitious niece – Avani, who watches an aerospace show starry-eyed. Avani wants to pursue aerospace engineering, but is bogged down by the course fees. Neha has a simple solution – an education loan. She explains to Avani how an education loan would seamlessly bridge the timing gap between a future salary and a current fees requirement – by offering a moratorium period (requiring no repayment) till Avani completes her course and starts earning. Since 2001, many banks have started offering education loans, she explains, and that is the solution that a lot of students are now turning to.
Just like education loans, a host of other loan products offered by banks cater to non-business needs of individual customers – vehicle loans, housing loans, agricultural credit, personal loans. To add to it, credit cards also enable expenses with a payment lag – fit to classify as a short-term loan! The Indian government too stands in support of retail lending, as evidenced by the launch of MUDRA loans under PMMY (Pradhan Mantri Mudra Yojna) in April 2015 – covering micro loans between INR 50,000 to INR 10 lacs for eligible entrepreneurs.
Demand for retail loans
While banking traditionally referred to wholesale lending, retail lending has caught up. It is now as much a part of core banking as corporate lending. What is causing this burgeoning rise in retail loans?
- Ease and availability – Almost all banks offer a wide range of focused retail products, with many having a retail lending business that surpasses their wholesale lending operations.
- Awareness and wide reach – Banking has reached remote rural areas, giving a fillip to agricultural credit and other segments of rural credit.
- Consumerism – Qualitative and quantitative rise in consumption along with the desire to own the next big thing is fueling the demand for personal consumption-linked loans.
With a population over 1.3 trillion at present, India is expected to surpass China as the world’s most populous country around the year 2024. While the general population grows, the tilt towards consumerism and the common man’s desire to lead the high life shall ensure that the sub-set of those availing retail loans – more particularly – education, housing, vehicle and personal loans is set to increase. While the economic cycles may put temporary slowdowns in the consumption pattern, in the longer term, population growth could only point towards a spurt in the demand for retail loans. What does this mean for those on the other side of the counter – i.e. the country’s lenders? Let’s find out
Retail loan growth trajectory
Recent developments in the Indian economy, to list a few, apart from the general economic slowdown include:
- NBFC crisis
- Prolonged slump in the real estate sector
- Trough in the auto industry cycle
- Mild slowdown gripping the FMCG industry
As India Inc. grapples with these issues, there is sufficient caution in the air towards corporate sector lending. Banks have ingeniously turned to the retail segment and that appears to be a stable source of business growth.
Retail lending not has not only crossed the half-way mark as a percentage of total advances but is also now growing at a pace faster than the overall domestic loan book for many of the country’s largest banks:
- SBI, the country’s largest lender, boasts of 57% retail loan book [1]
- 67% of ICIC Bank’s loans are retail loans. Its retail loan book grew at ~22% over the financial year 2019 as against overall growth of ~17% in its domestic lending business[2]
- For HDFC bank, the domestic loan mix between retail and wholesale stands at 54:46[3]
- Even for some other private banks like Axis Bank and Kotak Mahindra Bank, retail accounts for almost half of their loan books[4]
But is this retail growth story flawless? Or is it fraught with an underlying downside?
The potential challenges
While the banking sector mulls over the consequences of a rapidly expanding retail loan book, some of the downside has already begun manifesting.
Spurt in delinquencies
For one, the growth in retail credit over the past few years is not supported by a commensurate growth in wages and employment. Further, continued slowdown is leading to reduced ability to repay loans that were availed in happier times
- NPAs in the education loan segment have witnessed an increase – rising from 7.3% in March 2016 to 7.67% in March 2017, and further to 8.97% in March 2018[5]
- Concerns have been ever increasing about high NPAs in agricultural credit, with intrinsic inability to repay being the issue
- Advancing disproportionately high credit card limits to individuals combined with an increased usage (30% rise over the last financial year)[6] with a slowdown in the job market poses potential threats of delinquencies
- While home loans and vehicle loans are characterized by security enforceability if they turn bad, thanks to the property mortgaged/hypothecated, the initial hit that a delinquency result in affects the lending institution’s credit quality
While the bad loan problem is a larger systemic issue that the banking sector is struggling with, the contribution of retail loans delinquencies cannot be ignored
Potential increase in credit risk for the lenders
Several measures are being implemented through the banking system in an attempt to revive India’s economy. A closer look at these measures shows an inclination to support lending to individuals:
- As per recent announcement by the Finance Ministry, interest rate of retail loans shall be linked directly to repo rate – this will result in reduced EMIs for housing, vehicle and other retail loans[7]
- RBI has announced steps to encourage lending to NBFCs for onward lending to retail segment – agriculture, small businesses and home buyers[8]
While these tailwinds for the retail sector may point towards overall growth in the bank’s loan books, it may also challenge asset quality since this additional lending may actually be riskier credit as compared to average.All these loans to individuals – are they a fair risk? Is this a fairly benign trade? Or are we standing at the precipice of something that has potential to blow up into something much larger – on the lines of the recent NBFC crisis? Only time will tell!
- Financial express
- ICICI Bank Investor Presentation
- The Hindu
- Economic Times
- Indian Banks Association
- Economic Times
- InShorts
- Times of India