Second Covid-19 wave sharply hit consumer credit demand: RBI FSR

The second wave of the pandemic had a negative impact on the consumer credit demand as inquiries for such loans fell sharply across product categories after a rebound during the festive season in the third quarter of FY21, the half-yearly financial stability report (FSR) of Reserve Bank of India (RBI) said. 

Added to the worse was the stress that was building up in the risk profile of retail borrowers. The consumer credit includes home loans, loans against property, auto loans, two-wheeler loans, commercial vehicle loans, construction equipment loans, personal loans, credit cards, business loans, consumer durable loans, education loans, and gold loans.

The FSR report has highlighted that the overall demand for consumer credit, as reflected in inquiry volumes, had stabilised in Q4FY21 following a sharp rebound during the festive season in Q3FY21 after the first Covid wave receded. 

The consumer credit deteriorated after the loan moratorium programme came to an end in September 2020, the report said. 

The customer risk distribution of the credit-active population underwent a marginal shift towards the high-risk segment in January relative to the same month in 2020. In terms of credit risk migration, even low-risk tiers are showing downward momentum. The consumer credit portfolios of non-PSBs are seeing incipient signs of stress, it added. 

Despite this, the loan approval rates have remained healthy because there is a distinct shift towards better-rated customers by lenders. But, growth in credit-active consumers (who have atleast one outstanding credit account) and outstanding balances remained sluggish compared to last year. 

As far as the housing market is concerned, residential housing property registration and sales across major cities exceeded their pre-pandemic average levels during Q3 and Q4, aided by stamp duty cuts by some states, unmet demand during the Covid-related restrictions in the first half of FY21, and moderation in interest rates.

But, overall, credit growth in the system has been muted due to lackluster demand as well as risk aversion on the part of the lenders. In FY21, bank credit increased by 5.4 per cent year-on-year (YoY), the lowest in the past four financial years and it continued to remain subdued in Q1FY21. 

“Credit by public sector banks and private sector banks increased by 3.2 per cent and 9.9 per cent (YoY), respectively, whereas the loan book of foreign banks remained flat as of June 4,” the FSR report said. 

The overall credit to deposit (CD) ratio continued on its declining trajectory. The incremental CD ratio recorded an improvement during Q4FY21 but turned negative in Q1FY22 (up to June 4), the report added. Till March 2021, agricultural and personal loans grew at double digits but contracted since then (up to April 2021).