How RBI, industry put in checks place to slow down consumer credit growth

Tucked away in the ‘Report on Trend and Progress of Banking in India (T&P: FY22)’ was the observation that in recent years Indian banks appeared to have displayed “herding behaviour” in diverting lending away from the industrial sector towards retail loans. “Empirical evidence suggests that a build-up of concentration in retail loans may become a source of systemic risk. The Reserve Bank of India (RBI) is equipped with its policy toolkit.” The observation went below the radar – implicit in it was a warning as well. The banking regulator was uncomfortable with the runaway pace at which consumer credit was growing.

In mid-November 2023, Mint Road acted. Regulated entities (REs) were asked to review their exposure to the segment, “in particular” to unsecured credit. Top-up loans against assets, “inherently depreciating in nature” (such as vehicles), shall be treated as such. REs need to comply with the diktat at the end of February 2024. The risk weights on exposures of banks to non-banking financial companies (NBFCs) were also upped by 25 percentage points. Perhaps, these measures were inevitable. Not only had Mint Road mentioned the fast run-rate in consumer credit in its ‘T&P: FY22’, but in the months prior the banking regulator sought details of the retail books of a few banks and NFBCs over a five-year period. Some banks’ retail exposure had been growing at an annual rate of more than 60 per cent with the share at book level crossing the 50 per cent mark. And if this trend were to hold, retail credit would account for the lion’s share of banks’ loan books a few years down the line.

It now appears that REs on their part were already slowing down consumer credit. The latest TransUnion Cibil Credit Market Indicator (CMI) says that credit growth slowed across all consumption-led loan products; home-loan growth remained stagnant. The share of new-to-credit consumers in originations continues to decline across products. The CMI for September 2023 came in at 103 – four points higher than September 2022 — and continues the rising trend from a low of 88 in September 2021 (though the acceleration is on the wane).

‘Intensive monitoring’

Rajesh Kumar, managing director and chief executive officer (CEO) of TransUnion Cibil, says: “The latest CMI indicates continued stability in the Indian consumer credit market, as credit institutions aligned and responded effectively to the market trends over the last year. This stability now provides strong bedrock for driving balanced and sustained credit growth across products.” He adds: “Intensive monitoring of portfolios, while also finding and funding the lower-risk consumers who deserve financial opportunities for fulfilling their aspirations, can set India’s credit industry on the path for long-term growth”.

The swing towards retail was rooted in India Inc’s weakness over the past few years, which was the bad loan pile-up and reduced banks’ appetite forcorporate credit. Later on, monetary accommodation by Mint Road during the pandemic led to another issue: The resultant liquidity led to corporate deleveraging even as pricing of top-tier loans went out of kilter with the risks banks had to undertake.

The RBI’s ‘Consumer Confidence Survey’ for November 2023 shows confidence during the period remained stable. The Current Situation Index remained unchanged at 92.2 from the previous round as higher pessimism on the current general economic situation and employment was counterbalanced by a positive turnaround in sentiment on current income. Respondents were fairly optimistic on the one-year-ahead prospects for general economic situation, employment, income and spending; the confidence on general economic and employment conditions were, however, a shade lower vis-à-vis the previous survey round, which led to a moderation of the Future Expectations Index (FEI) within the positive terrain.

That said, a few things need to be kept in mind. The RBI’s September bulletin has it that net financial savings were down at 5.1 per cent of gross domestic product (GDP) in FY23 from 7.2 per cent in the previous financial year. Financial liabilities of households were up 5.8 per cent last financial year compared with 3.8 per cent in FY22, suggesting a larger than usual recourse to debt-driven consumption. A report by Motilal Oswal (‘How sustainable is India’s household debt?’) notes that while household debt in India is low compared to other major countries, non-mortgage household debt at 26 per cent of GDP is comparable to that in the US, Canada, Japan and China.

 

Pay by card

Let’s take credit cards. The card base rose 19 per cent year-on-year to 96 million in November with spends up 39 per cent at Rs 1.61 trillion. Now, given its unsecured nature and the fact that household indebtedness is on the rise as mentioned in the RBI’s September Bulletin, is there a cause for concern here?

According to Parag Rao, country-head (Payments Business, Consumer Finance, Digital Banking & Marketing), HDFC Bank: “Credit cards are a much smaller part of this whole unsecured game, and I really don’t see too much worry in that space. For example, I think line utilisations on cards are still well within safe parameters. There are multiple credit bureaus today, and other checks which issuers do.”

Shyam Srinivasan, MD and CEO of Federal Bank, says his bank “has not seen an adverse movement in the quality of the book”, and reiterates that in a growing economy there is enough headroom; provided you are prudent in how you go about it”.

That said, there are other aspects to look at as well.

“In the last 14 months, delinquent credit volumes enrolled on our monthly platform have moved up almost three times to Rs 55 crore,” says Ritesh Srivastava, founder and CEO of FREED, a consumer debt relief platform. Almost 80 per cent of those who have signed up are in the age group of 21-35 years with an annual salary of around Rs 5 lakh. Indebtedness is on the rise, much of it to fuel impulsive buys, and hawked by fintech. “We need to look at debt-to-income models differently. You may be leveraged only up to 20 per cent of your income, but this does not mean your expense is also capped at that level.” He gives the example of credit-card outstanding. “This definitely bodes well for consumerism, but there’s a huge cause for concern due to the surge in indebtedness, higher inflation and the obnoxiously high interest rate on credit cards in India,” says Srivastava.

The RBI’s ‘T&P: FY23’ is not alarmist. It simply says that the rate of growth of the unsecured retail segment has outpaced total bank credit growth. “The asset quality of the unsecured retail loans has not shown any deterioration so far.” This finds echo in the December 2023 ‘Financial Stability Report’: “Despite the sharp growth in retail lending, underlying asset quality has improved. The GNPA (gross non-performing assets) ratio of total retail advances improved to 1.6 per cent in September 2023 from 2 per cent in September 2022… The GNPA ratio of unsecured retail advances improved to 2 per cent in September 2023 from 2.5 per cent a year ago”. TransUnion Cibil also seconds this: “Early (vintage) delinquency has decreased across products, except for credit cards”.