Instead, the concerning issue is the dominance of consumer loans over business credit, which plays a pivotal role in job creation.
Retail Lending Surpasses ₹50 Trillion
In November, the retail lending by banks in India achieved a significant milestone by crossing ₹50 trillion for the first time. This amount, as of 30 November, reached ₹50.6 trillion, encompassing housing and vehicle loans, credit card receivables, loans against gold jewelry, personal loans, and more.
Presently, retail lending constitutes approximately 32.5% of the non-food credit provided by banks. Notably, the non-food credit excludes loans designated for food procurement activities. Remarkably, a decade ago, as of March 2013, bank loans to the industry accounted for 45.8% of non-food credit, a percentage that plummeted to 23.1% as of November. During the same period, the proportion of retail lending swelled from 18.4% to 32.5%.
The surge in retail lending can be ascribed to both immediate and long-term reasons. In March 2023, retail lending by banks constituted 29.9% of non-food credit. The spike since then is partly attributed to the merger of HDFC with HDFC Bank in July 2023, effectively consolidating the entire home loan portfolio under banks’ jurisdiction.
Moreover, long-term dynamics have come into play, particularly the trend of Indian banks, especially public sector banks (PSBs), excessively extending loans to the industry. The proportion of loans to the industry grew from 38.9% of non-food credit in March 2008 to 45.8% in March 2013. However, numerous corporate defaults, particularly from PSBs, have led to a restructuring of the Indian banking landscape.
PSB Crisis: The Quiet Rise of Private Banks
The transformation of Public Sector Banks (PSBs) has been a subject of much discussion in recent times. The Reserve Bank of India’s (RBI) directive to clean up balance sheets in 2015 marked a significant turning point for PSBs, curtailing their ability to continue lending and allowing private banks to seize a larger share of the market. This shift is evident in the numbers, with PSBs’ share of loans decreasing from 75.5% to 53% and private banks’ share increasing to 42.1% by September 2023.
The changing landscape of banking also sees a marked preference for retail loans, a domain historically dominated by private banks. However, in a surprising shift, PSBs have embraced retail lending, with these loans surging from 14.3% to 28.3% of overall loans by March 2023. Aside from this, issues such as the exponential growth in retail lending, the impact on household financial savings, and the expanding bank credit in relation to the GDP, have raised concerns about the long-term sustainability of these trends.
Rising Concerns and Consequences
The rapid increase in retail lending has led to a rising worry about the surge in unsecured personal loans and its potential impact on financial stability. Furthermore, the growth in retail lending has implications for household financial savings, with individuals allocating a larger portion of their income towards loan repayments, resulting in decreased savings, which poses a threat to India’s economic well-being in the long run.
Beyond the growth in retail lending, the proportion of non-food credit to GDP has escalated, indicating a substantial increase from 49% in 2013 to 53.3% by September 2023, with a significant contribution attributed to the HDFC merger. These developments compel contemplation on the sustainability of this trajectory and its potential consequences for the overall financial stability and economic growth of the nation.
In the evolving landscape of banking in India, the dynamics of lending have experienced a significant shift. Over the last decade, retail lending by banks has seen substantial growth, reaching 15% of GDP in March 2023 from 9% in March 2013. Concurrently, industrial lending has contracted from 22.4% to 12.2% during the same period, while lending to micro, small, and medium enterprises has also declined.
Impact on Banking Sector
The banking sector’s limited growth over the past decade has largely been attributed to the expansion in retail lending. Non-retail lending by banks has decreased from 39.9% of GDP in March 2013 to 35.1% in March 2023, indicating a concerning trend. This shift is critical as non-retail lending traditionally fuels economic activity and job creation.
The decline in non-retail lending raises concerns about the financing of economic activities and the subsequent impact on job creation and loan repayments. The shift in lending patterns reflects challenges from historical corporate over-lending, which may require considerable time for recovery.
