Retail loans have been the only engine of growth for bank credit since 2013-2014, with a large chunk of this portfolio secured and collateralized. But in times of low credit growth, banks tend to lower the bar on unsecured lending. This is evident from the fact that growth in unsecured credit card outstandings is back to 2007-08 levels, a time when credit card spending had grown by leaps and bounds.
Latest data from the Reserve Bank of India (RBI) shows that in February, credit card outstanding was 28% higher from a year ago and on an average the outstanding has risen around 29% for the first 11 months of fiscal year 2016-17 (FY17). This compares with a similar growth in FY09 when banks had been pushing credit card loans.
That push came to haunt them later, as cardholders defaulted on payments. Could that scenario play out again?
Indeed, the demonetization months of November and December saw a greater reliance on credit cards because of the cash purge. Another set of RBI data shows that in February, credit card swipes in both point of sale and automated teller machines added up to Rs28,631 crore, a sharp increase of 37% from a year ago. However, the fact that card outstanding and monthly card swipes are growing fast does not mean that Indians are becoming more brazen in borrowing.
Juxtaposing the two sets of data over a longer period of time shows that Indians have in fact become more cautious on credit card spending. About 60% of the card outstanding is fresh swipes, while 40% are loans outstanding from earlier spends. This 40% could include the interest-free 45-day period that credit cards offer as well as customers availing of the facility to pay credit card bills through equated monthly instalments. This ratio has risen over the last 10 years. In 2007-08, only 20% of card outstanding was from fresh swipes, which means credit card loans remained overdue for a greater period of time and repayment rates were low. Recall that private banks, notably ICICI Bank, suffered some losses on their unsecured loan portfolio owing to this trend in 2008.
Reliance on credit cards may be growing again and swipes may also continue to increase but given the larger proportion of fresh swipes in overall card loans, the repayment capacity of individuals seems healthy. Perhaps this time around, banks may escape the side effects of unsecured retail lending.