Retail loans set to become largest segment for Indian banking industry

Lenders depending on personal loans rather than industrial credit

Retail loans, including home and credit card debt, are expected to become the largest segment for the Indian banking industry, ahead of industrial credit and corporate loans, by the end of March this year.

In the first nine months of FY21, bank’s outstanding industrial credit was down 1.2 per cent year-on-year (YoY) to Rs 27.6 trillion (as of December 18, 2020). During the same period, outstanding personal loans were up 9.5 per cent YoY to Rs 26.6 trillion.

As a result, personal loans pipped service sector loans to become the second-largest category for Indian banks. Total outstanding bank credit to the service sector was worth Rs 25.8 trillion as of December 18, 2020, up 8.8 per cent YoY.

Many analysts saw this coming. “It’s a matter of time when retail loans become the biggest segment for banks. The industrial credit and corporate loans segment is in a bad shape since 2014-15 and has shown no sign of a recovery. Banks now largely depend on personal loans — such as housing loans, auto loans, and credit cards — to grow their business,” said Shailendra Kumar, CIO, Narnolia Securities.

According to the Reserve Bank of India (RBI) data, banks shrunk their industrial and corporate loan book, and repayment in the segment exceeded fresh disbursements. Outstanding industrial credit was down around 5 per cent between March 31, 2020, and December 18 2020; service sector loans were down 0.6 per cent during that period. In contrast, personal loans were up 4.3 per cent, while agriculture loans were up 7.6 per cent.

Others attributed the decline in industrial credit to the continued slowdown in the country’s manufacturing and industrial sectors. “The manufacturing sector has been in the slow lane for many years now with little or no fresh capex. This greatly reduces demand for corporate credit as loan growth is most often tied to capacity expansion or greenfield projects,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

Analysts said the slowdown in industrial and corporate loan may make it tough for public sector banks to grow, and private sector banks will continue to grab PSBs’ share in the overall credit market.

Personal loans, at the end of December 2020, accounted for nearly 29 per cent of all bank non-food credit, up from 27.7 per cent at the end of March last year and 19.4 per cent in at the end of March 2015. The share of industrial credit declined from 44.3 per cent in March 2015 to 29.8 per cent at end of December last year.

In contrast, the decline in interest rates and spread of technology-based lending led to a boom in retail credit. And the fastest growth was witnessed in the unsecured credit segment, comprising credit card loans and other personal loans. The share of secured credit, such as housing and auto loans, has declined in the overall personal loan portfolio.

According to the RBI data, housing, vehicle loans, and credit card are the three biggest sections of the personal loan segment. The housing section alone accounted for 52.3 per cent of all personal loans, as of December 18, 2020. However, credit card outstanding and other personal loans have grown the fastest in the past five years, while the share of housing, vehicle, and education loans have seen a decline in the overall personal loan pie.

Credit card outstanding accounted for 4.1 per cent of all outstanding personal loans in December 2020, from 2.8 per cent five years ago. In the same period, other personal loans grew from 21.3 per cent of the pie to 29.6 per cent.