The Retail Credit Binge

DID YOU KNOW that in FY23, the incremental share of retail loans on bank books was 39%, lower than the 51% in FY21? Total incremental credit was ₹17,83,913 crore of which the share of retail was just ₹6,98,186 crore. In FY21, incremental credit was ₹5,78,648 crore, of which retail was ₹2,96,324 crore. Does this suggest that the retail banking party is winding down? No. It is a statistical mirage — because wholesale credit offtake is also picking up, retail's incremental share was bound to move southwards given the larger loan sizes in wholesale.

Retail loans are, in fact, booming. In April, TransUnion CIBIL said its CIBIL Credit Market Indicator (CMI), the only tracker of health of retail lending in the country from a credit bureau, hit 100 in December 2022, up from 93 in December 2021. CMI measures consumer credit health trends by evaluating hundreds of reported credit variables.

The just released Reserve Bank of India's (RBI's) Consumer Confidence Survey for May 2023 noted the current mood as upbeat compared to May 2022. Respondents were optimistic about the general economic situation in the year ahead. Perception of households has been improving steadily since September 2022. The Monetary Policy Committee (MPC) recently said urban spending remains robust — passenger vehicle sales and domestic air passenger traffic recorded double-digit growth in April. Rural demand is gradually improving, though unevenly — motorcycle sales expanded in April while tractor sales contracted, partly due to unseasonal rains. Investment activity is picking up as reflected in healthy expansion of steel consumption and cement output for the month.

Why The Binge

The swing towards retail banking has its roots in India Inc.'s weakness over past few years that led to accumulation of bad loans and reduced banks' appetite for corporate credit. The monetary accommodation by Mint Road during the pandemic and resultant liquidity led to corporate deleveraging and pricing of top-tier loans going out of kilter with the risks banks had to undertake. Take Axis Bank. It pivoted its wholesale book to higher quality companies. But because of excess liquidity "they (companies) were able to borrow at rates which did not make sense for us. So, we obviously stayed away from a lot of deals," says Amitabh Chaudhry, managing director and chief executive officer, Axis Bank. Retail's share continued to grow as wholesale lending slowed. "We have now seen more maturity returning to wholesale pricing, and as private capex has picked up, our wholesale book has started growing at historical rates again," says Chaudhry. This puts in perspective the slip in incremental share of retail portfolio from FY21 to FY23. It will be some time before rise in retail credit starts reflecting on bank books at a granular level.

At another level, it's hard to square all this with the larger reality of sluggish GDP growth over past four years as well as job layoffs and wage cuts. But Shyam Srinivasan, MD and CEO of The Federal Bank, looks at it differently. "Our current GDP growth is encouraging in the global context. There is underlying demand for retail credit on the back of good momentum in consumption on ground. I am of the view that there have not been large-scale layoffs in the corporate sector to affect demand," he says.

TransUnion CIBIL data says 35 million consumers bought their first credit product and became new-to-credit (NTC) in 2021; and another 31 million did so in first nine months of 2022. In 2021, millennials (born between 1980 and 1994) accounted for the largest part of this with 42%, share followed by Gen Z (29%), born 1995 and later. NTC consumers in India are slightly more concentrated in rural areas; in 2021, 67% were living in rural and semi-urban areas.

So, how does one sum up the big picture? According to Madan Sabnavis, chief economist at Bank of Baroda, the shift to retail lending reflects two things. The first is that banks are focusing more on this segment due to lower delinquencies. Second, individuals have taken advantage of extremely low interest rates. This is continuing even after rates have risen as demand for housing and vehicles, pent-up due to Covid-19, has been high. Alongside, banks pushed unsecured loans, offering lower rates than the unorganised market. People have been traditionally borrowing from moneylenders and pawn dealers. Now, with banks providing credit at a lower cost, unsecured loans have become attractive. The assumption again is that small amounts reduce the possibility of simultaneous defaults.

But Sabnavis sounds a word of caution. "This needs to be monitored closely by banks to ensure that there is no increase in delinquency rates," he says. "We have a case where large companies are deleveraging while individuals are borrowing more to have a better lifestyle. It shows changing patterns in consumption too where people are not averse to borrowing for consumption."

This is where RBI comes into the picture. In its Report on Trend and Progress of Banking in India (2021-2022), the banking regulator has observed that in recent years, Indian banks appear 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 is equipped with its policy toolkit to handle any systemic risk that may arise," it said.

Over past few months, RBI has asked a few banks to submit five-year data on retail books with segment-wise break-up. Some banks' retail exposure had been growing at an annual rate more than 60% with share at book level crossing the 50% mark. If this trend were to hold, retail credit will account for a lion's share of banks' loan books a few years down the line.

This, though, seems unlikely. A cautionary voice has come from RBI governor Shaktikanta Das. In May this year, he did some plain-speaking to full boards of state-run as well as private banks, telling them to exercise prudence in growth strategies, product pricing and portfolio composition. Over-aggressive growth, underpricing or overpricing of products both on credit and deposit side, concentration or lack of adequate diversification in deposit/credit profile can expose banks to higher risks and vulnerabilities. "Let me emphatically state that the Reserve Bank does not interfere in commercial decision making of banks but only gives them a nudge to address potential risks and vulnerabilities," he said.

For a binge — of any kind — is not good.