Retail loans may rise as banks go slow on big-ticket corporate debt

But increase may be lower than what it was earlier

The growing reluctance of banks to shell out big-ticket corporate loans is tilting the scale in favour of retail borrowers.

According to Akash Lal, senior partner, McKinsey, with these retail loans having accounted for almost 100 per cent of risk-adjusted revenue in FY20 despite them constituting only 48 per cent of the banking system’s total revenues, the overall share of retail loans of banks is only set to go up.

Experts feel banks would be in no rush to disrupt this strategy despite potential asset quality issues. “If there is no demand from the corporate sector and we have surplus liquidity, where else to deploy funds?” asked Prashant Kumar, managing director (MD) and chief executive officer (CEO), YES Bank. “When interest rates start to move up, banks will need to make huge marked-to-market provisions.”

A granular analysis of sectoral credit deployment data also supports these view points. While the overall credit deployment isn’t showing positive signs, the picture may have been a lot different without the support of retail credit. In fact, improving credit enquiry trends from retail borrowers are playing a huge role in keeping up the buoyancy of the credit market. Experts are of the opinion that the retail segment growth may not be akin to FY19 trends when it was over 20 per cent.

Ashish Singhal, MD, Experian Credit Information Company of India, said there is a pick-up in demand, but that is in favour of secured assets. “We are almost close to 80 per cent of pre-Covid levels (enquiries) in case of secured loans. In unsecured assets – largely personal loans – enquiries are about 60 – 65 per cent of pre-Covid levels.” This also corroborates the RBI’s customer confidence survey that discretionary and non-essential spending is likely to reduce in the coming months. Reduction in stamp duty on home purchases and rock-bottom home loan rates are helping the segment, while the forced shift to private transport is aiding vehicle sales and auto loans.

Personal loans are often linked to indulgence spending or towards unavoidable essential exigencies. Here, Singhal said demand may have come off due to credit worthy or good customers not opting for these loans like before. This is because they may be still on a wait-and-watch mode or banks tightening credit evaluation parameters or a combination of both.

Mckinsey expects the consumer finance volume to grow by 8-10 per cent for the next six years, a sharp deceleration from the 16-20 per cent run-rate in the past. 

Krishnan Sitaraman, senior director, financial sector ratings & structured finance ratings, CRISIL, foresees banks starting to budget higher delinquencies on retail portfolios and charging a relatively higher rate to price in for an increased default risk, wherever possible.

As Singhal highlights, in the coming months, rating agencies and banks will get a clearer picture on how the moratorium may have hit the credit worthiness of customers.

“Credit scores get built up or destroyed over a reasonable period of time. Even if they were to deteriorate very quickly, it’s not something that happens in a month – we have to wait for a quarter to definitively say what is happening,” he said. It’s only by the end of December that Singhal said one would know if customers who took moratorium are performing better compared to those who didn’t.

Also, a mere bulge in the 30 days past due (DPD) bracket need not automatically point to stress as historical data indicates that most borrowers rush to remain standard within 90 days, to ensure credit scores aren’t disturbed. To that extent, the trend put out by NPCI’s data on bounce rates at 40.5 per cent in volume terms and 31.1 per cent in value —up 940 bps and 640 bps, respectively, year-on-year — though a sign of growing stress, may not be entirely alarming, just yet. “I do not think the entire reason for the rise is because of people are finding it tough to repay,” said Sitaraman.

While cheque bounce rate is a sign of rising delinquencies, it may not be entirely linked to loan repayment. “Equated monthly installments (EMIs) have multiple modes of collection – auto debit is one of them. There could be post-dated cheques and physical collection,” added Sitaraman. Borrowers not having to meet their EMI obligation due to moratorium may have also disrupted the habit, in which case, it may take a few months for them to get back on ground, he added.

But whether interim or not, the loss of credit discipline is bound to eat into the asset quality. Analysts at Macquarie Capital estimate that a system-level, retail non-performing assets may rise to a 10-year high of 4 per cent in the coming quarters from the bottom of 2 per cent now. Bankers acknowledge the evolving situation.

The saving grace for retail loans lies in their granularity. The impact of one big-ticket loan going bad would be so severe that even 25-30 per cent (going by past trends) of a retail loan basket turning bad wouldn’t be so much.  This is why Lal estimates that for the next two years, if total risk in the market is anticipated at Rs 12-15 trillion, retail segment’s contribution may be restricted to Rs 1.02-1.7 trillion — less than a tenth of the stress. Wholesale loans will remain the trouble spot.