Retail loans roll on for banks, but risks loom

Retail loans, or loans to individual borrowers, first overtook industrial loans in November 2020, and have since opened their lead—from 1% in December 2020 to 15% in October 2022. Of the four main borrowing sectors, individuals are now the largest for Indian banks. The past year has seen a revival in bank lending. While all four sectors registered a healthy increase in loans, the standouts were services (growth of 22% in the 12-month period to October 2022) and personal loans (20%).

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Within personal loans, all nine segments for which the RBI releases data have grown more than 10% in the past year. There are two discernible patterns. One, there is consumer offtake of discretionary items, as evidenced by the growth in housing, vehicle and consumer durable loans. Two, individual borrowers are resorting to greater leverage. They are borrowing more against assets like gold, shares and fixed deposits, some of which could be to tide over difficult times. They are also deferring more payments, illustrated by the brisk growth in credit card outstanding.

Safety in Numbers

The second pattern, if it plays out in the worst way and sees individual borrowers default on some scale, could be a setback to the banking sector at a time of repair. In the 12-month period to October 2022, the banking sector has registered overall credit growth of 17%.

This is a significant improvement over the 7% and 5% in the two preceding years. Higher credit growth has also been accompanied by a decline in bad loans—gross non-performing assets (NPAs), as a share of total assets, declined to a seven-year low of 5% in September 2022.

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Historically, among the four categories of borrowers, personal loans have demonstrated the lowest delinquency, which is partly why banks have been gravitating to them. As of September 2022, personal loans had a bad loans ratio of 2.8% and accounted for about 11.7% of total bad loans in the banking sector.

Retail Challenges

Although personal loans show lower delinquency, banks have to work harder to get individual business. Illustratively, the equivalent of a single corporate loan of ₹100 crore would be 200 individual home loans of ₹50 lakh each. Several factors have made banks more amenable to personal loans in recent years. These include corporate defaults and an economic slowdown on one side, and unfettered spending by the top-end of consumers and an expansion of the bank branch network on the other side.

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In the past year, for example, banks registered a year-on-year growth of 22% in vehicle loans. In doing so, they beat non-banking finance companies (NBFCs) in share of this segment after three years. According to RBI data, as of September 2022, NBFCs accounted for about 19% of all personal loans outstanding, and their two main segments were vehicle loans (40%) and gold loans (14%).

Managing Expansion

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The latest RBI status report elaborates on “systemic risk” in individual loans. It says: “… ‘systemic as a herd’ refers to a phenomenon when institutions which are not individually systemically important behave in a way similar to the market leaders and, as a result, get exposed to common risks”. As of September 2022, for example, public sector banks had gross NPAs of 15.8% in credit card receivables and 7% in education loans. Similarly, private banks had 5.1% gross NPAs in education loans. In 2021-22, retail accounted for 53% of ICICI Bank’s advances and 42% of SBI’s. In the last six years, the two personal loan segments leading the largest growth in individual accounts are consumer durables and credit cards. Banks have largely preserved asset quality in personal loans. As this space expands, so will the challenges posed by it.

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