Personal loans galore: Credit offtake to outpace deposit growth in FY24

Personal loans have been the biggest drivers for India's banking sector as corporate lending  has stalled due to rising non-performing assets and deleveraging in fiscal year 2023. Despite consecutive repo rate hikes, borrowings increased by 15 per cent year on year till March 2023,  the longest annual jump in credit offtake in the last eleven years. 
 

Rating agency CareEdge expects credit offtake to outpace deposit growth in fiscal year 2024 due to the economic expansion, rise in capital expenditure, implementation of the PLI scheme, and retail credit push. CareEdge estimates the credit growth to be in the range of 13%-13.5% and deposit growth to be in the range of 10-10.5% during FY24.

The Personal loan segment is expected to continue doing well compared with the industry and service segments. However, it has cautioned that slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth.

The personal loan segment (largest segment with a 32.1 per cent share) witnessed a robust growth of 20.6 per cent y-o-y in March 2023 due to strong growth in unsecured loans, vehicle, and home loans, said Care Edge Rating. 

"Direct Assignment transactions (sale of loan books) by non-banking financial corporations of over Rs 1.7 trillion along with co- lending and direct lending have contributed to the growth of which around 80 per cent was taken up by banks. This has resulted in the personal loans segment increasing its share and that is likely to continue to grow further given the focus on the segment," said Sanjay Agarwal, Director at Care Ratings. 

 

Housing loans (share of 47.4 per cent within personal loans) grew  15 per cent y-o-y in March 2023 compared with 12 percent  in the year-ago period. Despite reporting healthy growth, the share of housing loans dropped to 47.4% in the personal loans segment as of March 24, 2023, vs. 49.7% over a year ago period.

Unsecured loans grew at a faster pace. They reported a  growth of 26.4 per cent y-o-y in March 2023 due to the miniaturization of credit, digitalization of loans (faster loan turnaround and easier process), and preferences for premium consumer products, noted the report. Its share increased to 32.6 per cent in the personal loans segment as of March 24, 2023, vs. 31.1% over a year ago. 

"As corporate lending remained subdued, banks have focused on personal loans especially unsecured personal loans to drive growth. Another advantage has been that these loans typically carry relatively higher interest rates, thereby boosting margins," said Aditya Acharekar Associate Director – BFSI Ratings at CareEdge. 

Vehicle loans (a share of 12.3 per cent within personal loans) grew  24.9 per cent y-o-y in March 2023 as compared to 9.3 per cent in the year-ago period. In FY23, passenger vehicles grew  27 per cent, commercial vehicles by 34 per cent, tractors by 12 per cent, and 3-wheelers by 87 per cent on a y-o-y basis. The growth in sales volume across segments was supported by healthy demand in the urban areas, increasing replacement demand, growing demand for utility vehicles in the passenger vehicle segment, vehicle scrappage policy, and higher infrastructure spending.

"Passenger vehicles and commercial vehicles are expected to drive demand, while two and three- wheelers will gradually increase sales and cross the pre-pandemic level. This in turn is expected to continue the momentum in vehicle loans. However, vehicle upgrades, inflationary pressure and the mandatory implementation of BS-VI Phase II regulation from April 2024 may lead to significant price hikes across all vehicle segments, potentially affecting demand," noted the report. 

Bank credit  growth maintained a double-digit growth and continued to outpace deposit growth in FY23. The personal loans segment has remained the largest segment, along with non-banking financial institutions, while the industrial sector reported muted growth. 

The private sector banks (PVBs) have continued to outpace the public sector banks (PSBs). "The medium-term prospects look promising with rising personal loans along with NBFC borrowings and a substantial buffer for provisions. Additionally, given that in FY23, credit offtake closed with a growth of 15%, it would be working off a higher base CareEdge estimates the credit growth to be in the range of 13%-13.5% during FY24 excluding the impact of the merger of HDFC with HDFC Bank, if we include the merger, the growth is likely to be higher by around 3%. However, elevated interest rates and global uncertainties could adversely impact credit growth,"noted the report.

In absolute terms, credit outstanding stood at Rs136.8 trillion as of March 24, 2023, rising by Rs 17.8 trillion from March 2022 vs Rs 10.4 trillion in the same period from the last year. The credit growth  in FY23 has been driven by a lower base of the last year, unsecured personal loans, housing loans, auto loans, higher demand from NBFCs, higher working capital requirements due to elevated inflation from select industries and depreciation of the Indian Rupee (INR).

"On a y-o-y basis, credit growth began picking up in H2FY22 and surpassed deposit growth in Q4FY22, since then it has continued the momentum. Meanwhile, in terms of absolute growth, credit offtake rose by 33.2 per cent from March 27, 2020, whereas deposit growth came in at 33 per cent. Credit growth overtook deposit growth in the period," said Saurabh Bhalerao Associate Director – BFSI Research. 

Deposits continue to Grow Slower than Credit Offtake

Deposits registered a growth of 9.6 per cent y-o-y for March 24, 2023. Time deposits grew 10.2 per cent y-o-y, while demand deposits rose  5.2 per cent vs. 8.6 per cent and 11.4 per cent y-o-y, respectively, as on March 25, 2022. Meanwhile, in absolute terms, bank deposits have increased by Rs.15.8 lakh crore from March 2022.

Movement in CASA Share

 

A higher CASA ratio means the higher portion of the deposits of the bank has come from current and savings deposits, which is generally a cheaper source of funds. Many banks don’t pay interest on the current account deposits and money lying in the savings accounts attracts a limited interest rate. Hence, a higher CASA ratio means a better net interest margin, which means better profitability for the bank. The rising deposit rates have incentivised banking customers to increase their term deposits, thereby reducing the CASA share in the banking system. This reduction is also expected to increase the cost of deposits thereby pressuring NIMs.

According to CareEdge, deposit growth is expected to improve in FY24 compared to the growth in FY23, as banks offer higher rates (lagged transmission compared to lending rates) to shore up their liability franchise and ensure that lagging deposit growth does not constrain the credit offtake. CareEdge estimates the deposit growth to be in the range of 10-10.5 per cent during FY24.