As they say, it pours after it rains. Retail bankers are being caught in the crossfire on several fronts. While new borrowers are getting harder to come by, the burden placed on current borrowers has increased due to the spike in interest rates over the past 18 months. High-value purchases like homes and cars are already being avoided by borrowers due to the ongoing inflationary pressures. The industry’s lower capacity utilization is a further factor limiting the corporate book’s growth. Finally, by raising risk weights, the RBI has increased the cost of consumer loans, particularly credit cards and personal loans.
The RBI’s steps for increased capital for unsecured loans, according to Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, address two key concerns: First, the excessive growth of unsecured consumer loans is anticipated to be restrained by the higher capital requirement. It also restricts the spread of any systemic risks associated with lending to NBFCs in the banking industry.
Shaktikanta Das, the governor of the RBI, has been raising concerns about the rapid increase in unsecured loans, especially in the sub-Rs 50,000 range. Following 2008, NBFCs that lent a lot of money on personal loans—CitiFinancial, Fullerton, Pragati, and many more—had trouble making ends meet, and some of them went out of business. Over the past five years or so, the only lending that has made up for the slower growth on the corporate side has been consumer lending, especially unsecured loans.
Small-ticket personal loans account for less than 1% of the total retail loan book at an industry level, even though banks have witnessed the fastest growth in unsecured loans and an increase in their share of the loan book. It’s not the banks that are more exposed, but rather the smaller NBFCs and the newer Fintech companies.
While delinquencies on small-ticket personal loans may have a limited impact on the overall personal loan portfolio, it is imperative to closely monitor them, according to a recent credit bureau TransUnion CIBIL Credit Market Indicator. “This is particularly important because consumers might prioritize other financial obligations over personal loan payments, potentially serving as a broader indication of financial strain, “it states.
What is the size of the nation’s largest banks’ portfolio of credit cards and personal loans?
Personal loans have grown significantly at ICICI Bank, the second-biggest private bank in the nation. In the September 2023 quarter, personal loans increased by 40% year over year and by 10% sequentially. The portfolio of credit cards has increased by roughly 6.0 percent in a sequential manner and by about 30% annually.
On the balance sheet, these loans make up a small portion of the total. In September of this year, the portfolios of credit cards and personal loans made up 3.9% and 9.4% of the total loan book, respectively. On the other hand, personal loans made up 17% of the retail portfolio, and credit cards, 7%.
At the moment, retail loans make up 54% of the bank’s loan book. According to the bank, its presence is negligible in the smaller ticket size segment (less than Rs 50,000).
In terms of growth rate, personal loans at HDFC Bank increased by 15% year over year during the September quarter. About 15% of the bank’s retail book is made up of personal loans, while the combined percentage for credit cards and consumer durable loans is roughly 8%.
Personal loans account for 13% of Axis Bank‘s total loan volume, with credit cards making up 7%.
As of September 2023, IndusInd Bank‘s percentage of personal loans and credit cards is a pitiful 2% and 3%, respectively. Dinesh Khara, the chairman of the State Bank of India, recently allayed the fears of analysts by reassuring them that the bank’s portfolio of unsecured loans is safe and that the gross non-performing assets (NPAs) in this area are only 0.69 percent.
In the past, banks have sourced a sizable amount of personal loans from current salary account holders. Furthermore, banks have formed alliances with outside companies such as Fintech firms or Amazon, with whom they share transaction data and know their customers.
According to S&P Global, the RBI’s measures to limit riskier bank lending to consumers will hurt loan growth overall and in the nonbank sector specifically.
According to Kotak Mahindra Bank’s Group President and Head of Consumer Banking, Virat Diwanji, the RBI’s action is likely to achieve the intended goal of prudent unsecured lending, which may slow down the growth of unsecured lending over the next three to six months. In the unsecured market, “this move will push lenders to go selective on credit,” he continues.
According to Mahesh Shukla, CEO and Founder of PayMe, banks may have to pay more in capital costs for credit card and personal loans if risk weighting on these kinds of loans rises. For NBFCs and fintechs that depend on bank funding for their lending operations, this might result in higher funding costs. The cost of borrowing from banks may rise in proportion for NBFCs and fintechs as banks pass on the higher costs to their borrowers. According to Shukla, banks may adopt stricter lending standards and become more risk-averse in response to a higher risk weightage.
Fintechs and NBFCs may face more difficult funding requirements as a result, which would make it harder for them to obtain credit from conventional banking sources. The higher perceived risk could make banks pick their lending partners more carefully, he continues.