Retail unsecured loans, cross-selling may decline post moratorium

Lenders say the larger challenge is to communicate to borrowers the difference between moratorium and waiver

Earlier this month, when Rajeev Jain, managing director of Bajaj Finance, said that the larger challenge ahead of the company was educating its customers that a moratorium on loans isn’t a waiver, it sent out signals of a probable change in borrowers' approach towards credit in tough times like these. A few weeks later, HDFC Bank said the situation on the moratorium is an evolving one and it was too early to call out any specific trend.

“Our channel checks reveal that customers are opting for the moratorium even if they don’t require and in many cases customers believe banks will eventually waive off, or in case of penalties in credit card dues, they can complain and get it waived off eventually,” says Suresh Ganapathy of Macquarie, based on his interaction with relationship managers across banks. “This is really bad moral hazard getting created in the sector which doesn’t bode well for asset quality,” he said. Ganapathy has increased the credit cost for private banks from 1.3 per cent in FY21 to 2.5 per cent, owing to higher asset quality pressures in retail and small business loans. For public sector banks, the number has been increased from 2.3 per cent to 3 per cent for the ongoing fiscal.

What’s more, experts from the credit rating industry and even bankers say the change in customer behaviour post moratorium may nudge them to revisit their lending strategy. For one, Sathya Kalyanasundaram, country head and managing director, Experian India, says ability to service loans may drop and as a result there could be a temporary dip in sourcing of loans. “Quantum of sourcing will be different and an improvement in quality of sourcing will depend on recovery in the overall market,” he says. By this what he essentially implies is that loans lent to satisfy the aspirational needs of customers is set to change. “Loans are expected to be taken for more sustenance rather than discretionary spending, in the short to medium term,” he adds. Simply put, one should expect discretionary spends and demand for small tickets personal loans to drop going ahead. Experts say, even credit card applications and balance growth may also reduce. To some extent this was already visible in the lending data for March, when personal loans and credit card balances grew by a slightly slower pace of 23 per cent. Growth rates of the two segments was upwards of 25 per cent in the past six month.

The more important question is whether lenders will continue to rely on cross-selling as a tool like in the past. Cross-sell ratio or percentage of loans extended to existing customers is 68 – 70 per cent among private banks and non-banking finance companies (NBFCs). To be fair, the rating profile of borrowers shouldn’t change if they opt for moratorium and their credit bureau scores may remain unimpacted. But, banks internally would have record of customers who opted for moratorium despite having the ability to pay their dues and hence may be reluctant to lend to existing customers like they did in the past. “Cross-selling ratio is expected to be impacted for larger loans like home loans and vehicle loans, in the short to medium term,” says Kalyanasundaram.

In short, banks are turning cautious on two important pillars of growth – retail unsecured loans and cross-selling. Growth thus may take a back seat in the quarters to come. Sumant Kathapalia, MD & CEO, IndusInd Bank refraining from giving any growth projections and saying that the bank is focussing more on protecting the balance sheet rather than growth, says it all.