Amid increasing consumer reliance on “spend now-pay later” practices, retail lending, encompassing housing loans, credit card outstanding, and personal loans, has experienced notable growth. Concurrently, industry borrowings have exhibited a slowdown, signaling shifting borrowing patterns.
By November, bank credit to individuals and households had climbed above ₹50 trillion, nearly half of which were housing loans. Personal loans, as these are referred to in RBI speak, were about 40% more than the credit of ₹36 trillion extended to industry, including small and micro enterprises, at that point.
Understanding the Shift in Borrowing Trends
If the impact of the merger of HDFC Ltd with HDFC Bank is excluded, bank credit to individuals and households stood at ₹46.13 trillion against ₹35.83 trillion given to industry. Gross credit as personal loans exceeded lending to industry in 2021-22 by about ₹2.2 trillion, and that gap widened to ₹7.64 trillion in 2022-23.
Let’s explains the implications of the lower borrowing by industry, and what RBI’s real concern is with regard to the rise in retail loans?
What made bank credit to individuals exceed loans to industry?
Until the pandemic, credit to industry exceeded personal loans. However, growth in credit offtake by industry had been near stagnant since 2016-17, as borrowings by large industrial units were limited.
Actually, borrowings of industry fell in 2016-17 and 2017-18 from the levels of 2015-16. This was partly due to the disruptions caused by the demonetisation of the ₹500 and ₹1,000 banknotes on November 8, 2016, and the implementation of the goods and services tax from July 1, 2017. Slowing demand in the economy also affected industry’s demand for credit.
In comparison, borrowings by individuals and households continued to grow, led mostly by robust growth in housing loans due to tax incentives, attractive interest rates, and the launch of affordable home projects.
Housing loan, which accounts for about half of the total lending to retail borrowers, has been growing at the rate of 13-19% since 2010-11, though it slowed to a single digit during the pandemic when household incomes took a hit due to salary cuts and job losses.
Credit card outstanding and other personal loans also have been rising as many consumers went into spend now-pay later mode. Growth of credit card outstandings, vehicle loans, loans against fixed deposits and gold jewellery, and other personal loans were also responsible for faster growth of borrowings by individuals and households.
Concerns and Prospects in Borrowings across Industries
Industry borrowing is pivotal for working capital and investment. A slowdown in the economy translates to reduced investment needs. Consequently, numerous manufacturing units operated below their capacity and refrained from expanding. However, with economic growth gaining momentum and capacity utilization touching approximately 75%, and even up to 80% in certain sectors, businesses are contemplating investments in greenfield and brownfield projects.
Revival Factors and Credit Demand
Government-backed infrastructure spending and a flourishing housing sector have injected momentum into steel, cement, and related industries. Furthermore, heightened demand for passenger vehicles is poised to benefit steel manufacturers and component producers. As these entities opt for capacity expansion, the need for bank credit is anticipated to surge.
Challenges and Rural Prospects
Conversely, concerns loom over the producers of consumer goods, including durables and FMCG, as agrarian incomes have suffered due to crop failures and reduced output. Yet, the upcoming months preceding winter crop harvesting offer prospects for rural demand improvement, contingent upon favorable weather conditions and sufficient rainfall during the southwest monsoon.
RBI’s Concerns with Retail Loans
The Reserve Bank of India (RBI) is showing concerns about the escalating retail loans, with particular worries surrounding unsecured personal loans and credit card receivables. While housing and vehicle loans are relatively collateralized, the substantial rise in credit card outstanding and unsecured personal loans is raising red flags for the central bank.
Growing Risks with Unsecured Loans
The significant surge in credit card outstanding and unsecured personal loans is causing unease for the RBI, as these forms of borrowing lack substantial collateral. Credit card outstanding escalated by over 32% in 2022-23, outpacing the overall retail lending growth of 21% and the 15% growth in total non-food credit. With credit card outstanding not being collateralized, banks face the risk of potential losses if customers default on payments.
Similarly, the growth of unsecured personal loans, used for various purposes such as weddings, vacations, medical expenses, or home renovation, presents a risk for banks if borrowers fail to meet repayment obligations. These loans account for approximately 28% of retail lending and recorded a 27% surge in 2022-23.
RBI’s Measures to Address Unsecured Retail Loans
In response to the mounting concerns, the RBI implemented stricter regulations in November aimed at mitigating risks associated with unsecured lending. The central bank increased risk weights by 25 percentage points for certain components of consumer credit exposure, necessitating additional provisioning by banks to cover potential default risks. By making unsecured loans more expensive, the RBI anticipates a dampening effect on demand, ultimately aiming to uphold the financial stability of banks.
