There is a sense of déjà vu of the pre-2008 days, as banks once again woo customers with all kinds of loans, be it personal and auto loans or credit cards. Numbers certainly reveal that banks have changed course radically in the last two years, steadily increasing their share from retail loans. After unceremoniously abandoning personal loans and credit cards in 2008, banks have been growing the portfolio aggressively in recent times.
In the 2016 fiscal, retail loans have grown by a strong 19 per cent, even as growth in corporate loans slipped to an abysmal 2-odd per cent. The over 20 per cent growth in personal and vehicle loans as well as credit card business has led the growth in retail loans. Given tepid investment climate and stretched balance sheets of corporates, it may only seem natural that banks are now growing their retail business to offset the sluggishness in corporate lending.
But if stalled projects and stress in core sectors have spelt doom for banks, then they can also run similar risk from their huge unsecured retail loan portfolio, much like during the financial crisis, when many private banks burnt their fingers. It is time for banks to take stock and exercise caution.
Past lessons
From late 1990s to about 2005-06, retail lending in India boomed, growing over 25 per cent annually due to factors such as increased competition, higher disposable income, growing middle class acceptance of loans and others. One other key factor that led to such a steep growth was banks’ perception of low risk in such loans, a theory that was turned on its head during the financial crisis.
While among retail loans, housing loans being secured carry lower risk, banks earn thin margins given the intense competition in this segment. It is hence the more profitable unsecured loans such as personal loans and credit cards that banks turned to in the heydays.
In the two fiscals before 2008, retail loans grew by 30-40 per cent, with all segments firing including personal loans and credit cards. But that soon changed. Retail loan growth slipped to a modest 4-5 per cent growth in 2009 and 2010, with private banks taking conscious and tough calls to write off unsecured loans.
For instance, ICICI Bank used the 2009-11 period to aggressively write off its unsecured retail book, which nearly contributed to its downfall during the 2007-08 crisis.
Retail bad loans had shot up to 7-8 per cent, constituting a chunk of its bad loans. Axis Bank’s personal and credit cards that were about 20 per cent of its retail portfolio, was down to 10 per cent by 2013-14.
Where’s the rush?
That was two years back. With the pain of excessive exposure to such loans fading away, banks have been upping the ante. But chasing risky unsecured loans is a cause for worry. The credit card business that peaked at about ₹30,000 crore in 2008 and almost halved by 2011, has been growing steadily by over 20 per cent annually in the last two years -- now a ₹37,000 crore business. Personal loans too have been growing at a fast clip, ending the 2016 fiscal with a 25 per cent increase. Vehicle loans, while secured, are nonetheless riskier than housing loans, as they are offered against a depreciating asset. Surprisingly these loans too have had a splendid run, despite the not-much-to-write-home-about auto sales numbers. One reason for this anomaly could be that buyers are now using more credit than cash to purchase vehicles. This paints an even worrisome picture. Weak economic growth adversely impacting personal incomes, can nudge people to borrow more to keep up their spending, no matter what their credit absorption capacity.
Testing the waters
Instead of indiscriminately offering all kinds of loans, banks need to choose caution over profitability. Inadequate origination and monitoring can lead to unexpected slippages in the coming years. What is particularly worrisome is that PSU banks reeling under high levels of stressed corporate loans are now testing the waters, with retail loans. These banks have been late adopters to the usage of credit bureaus, and unless back end processes of underwriting customers are streamlined, adhoc focus on retail can spew problems.
Remember, the reason for unnaturally lower delinquencies in unsecured loans has mainly been due to banks’ relatively lower expansion into these segments. Delinquencies can soon catch up, if unbridled growth is not backed by proper credit practices.
Retail lending is just a decade old trend, and Indian banks still lag far behind their western counterparts, in adopting analytics and risk prediction models. It is worrisome enough that banks will have to carry their legacy corporate bad loans for sometime to come. If retail delinquencies gather steam, banks would find it way too difficult to drag themselves out of their morass of stressed loans, even if the economic cycle turns.