When it rains, it pours, as the phrase goes. Retail bankers have been caught in a crossfire from numerous directions. The rise of interest rates over the previous 18 months has made existing borrowers more burdened, while new borrowers are becoming increasingly scarce. Continuous inflationary pressures are already discouraging borrowers from making large-ticket purchases such as homes and automobiles. Lower capacity utilization in the industry is also limiting corporate book growth. Finally, the RBI has increased risk weights on consumer loans, particularly personal and credit cards.
According to Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, the RBI's steps to increase capital for unsecured loans address two significant concerns: For starters, the increased capital requirement is likely to slow the unsustainable rise of unsecured consumer loans. Second, it restricts the spread of any such systemic concerns in the banking sector to NBFC lending.
Indeed, RBI Governor Shaktikanta Das has been warning about the rapid growth in unsecured loans, particularly those under Rs 50,000. NBFCs with a significant percentage of personal loans, such as CitiFinancial, Fullerton, Pragati, and many more, had financial troubles after 2008, and some eventually folded. Only consumer lending, particularly unsecured loans, has compensated for the weaker growth on the corporate side in the last 5 years or so.
While banks have seen unsecured loans grow the fastest and increase in terms of loan book share, data suggests that small-ticket personal loans account for less than 1% of the retail loan book at an industry level. In reality, smaller NBFCs and new-age Fintech firms are more vulnerable than banks.
According to the TransUnion CIBIL Credit Market Indicator, while delinquencies on small-ticket personal loans may have a minimal impact on the entire personal loan portfolio, they must be regularly monitored. "This is particularly important because consumers might prioritise other financial obligations over personal loan payments, potentially serving as a broader indication of financial strain," it reads.
So, how big is the country's big banks' personal loan and credit card portfolio?
ICICI Bank, the country's second-largest private bank, has seen significant growth in personal loans, with a 40% year-on-year increase in the September 2023 quarter and a 10% sequential increase. The credit card portfolio has risen by over 30% year on year and approximately 6.0 percent sequentially.
However, the proportion of these loans on the balance sheet is small. In September of this year, personal loans and credit card portfolios accounted for 9.4 percent and 3.9 percent of the total loan book, respectively. Personal loans accounted for 17% of the retail portfolio, while credit cards accounted for 7%.
Currently, retail loans account for 54% of the bank's loan book. The bank argues that it has little representation in the smaller ticket size category (less than Rs 50,000).
In terms of growth rate, HDFC Bank had a 15% year-on-year increase in personal loans in the September quarter. Personal loans account for around 15% of the bank's retail book, while credit cards and consumer durable loans account for approximately 8%. Personal loans account for 12% of Axis Bank's loans, with credit cards accounting for 7%.
As of September 2023, IndusInd Bank had an extremely low percentage of personal loans and credit cards, with 2% and 3%, respectively. State Bank of India Chairman Dinesh Khara recently assuaged analysts' fears by stating that the bank's unsecured loan portfolio is in good shape, with gross non-performing assets (NPAs) at 0.69 percent.
Historically, existing pay account clients have provided a large share of personal loan sourcing for banks. Furthermore, banks have formed alliances with external entities such as Amazon or Fintech firms where customers are known to the bank and transaction data is shared with the partners.
According to S&P Global, the RBI's initiatives to limit riskier bank lending to consumers will slow credit growth and stress the nonbank sector in particular.
According to Virat Diwanji, Group President and Head of Consumer Banking at Kotak Mahindra Bank, the RBI's approach is likely to achieve the stated goal of responsible unsecured lending and may restrict the growth of unsecured lending in the next 3 to 6 months. "This move will push lenders to go selective on credit in the unsecured space," he said.
According to Mahesh Shukla, CEO and Founder of PayMe, if credit card and personal loan risk weightage increases, banks may suffer greater capital expenses for these sorts of loans. "This could result in higher funding costs for NBFCs and fintechs that rely on bank funding for lending activities." As banks pass on increasing expenses to their customers, NBFCs and fintechs may face an increase in the cost of borrowing from banks. Banks may become more risk-averse and adopt stricter lending requirements in response to increasing risk weightage," adds Shukla.
"As a result, NBFCs and fintechs may face tighter funding conditions, making it more difficult for them to obtain credit from traditional banking sources." "As perceived risk rises, banks may become more selective in their lending partners," he adds.
