Will housing loans be the new NPAs?
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Evidence of small housing loans turning sour is appearing on the horizon. According to news reports (See: Double in 5 years: Small home loan borrowers become big defaulters, The Indian Express, 29 July), while non-performing assets (NPAs) in the housing segment rose marginally to 1.4% in 2015-16 against the previous year’s 1.3%, the underlying disaggregates are telling: For housing loans under Rs.2 lakh, gross NPAs are 12% for all public sector banks; some of these banks have reported NPA levels as high as 40-50% in the last quarter of 2015-16.
These are high rates of default. Loan failure rates in the sub-Rs.2 lakh segment were around 6% five years ago. But looking at the bank lending patterns and the fast pace of growth in retail loans, especially in the last two years, the rise in failure rates is unsurprising; in fact, this was destined to happen. Observed patterns in the distribution and growth of bank credit offer a persuasive narrative: the mountain of bad loans to industry and infrastructure has arrested further lending in this direction, pushing banks to lend freely and rapidly to the retail segment.
Data for scheduled commercial banks shows that overall personal loan growth that measured 12.5% in 2013-14 rose to 15.5% the following year (2014-15); in 2015-16, the pace increased to a brisker 19.4%. Housing loans, a sub-component of this category, grew at 18.8% in 2015-16, against the previous year’s 16.7%. In the last three years, growth in housing loans has averaged 17.8%, a good deal higher than the 15% growth in 2012-13. And in the first quarter of 2016-17 (April-June), when aggregate non-food credit barely grew (0.1%), housing loan growth was at a decent 3.6% against a matching 3.9% in April-June 2015.
Compare this with loans to industry where banks have struggled. Total outstanding credit growth to all industries was just 2.75% in the year ending March 2016, below half of the preceding year’s 5.6% and a sharp decline in relation to an average growth of 14% in the two years to 2013-14. In the current year, outstanding credit to industry contracted -3.1% in April-June 2016.
Clearly, troubles in segments where banks are overburdened by bad assets have severely contracted their major source of revenue—interest income from corporate lending. Plus, banks are averse to lending more here for fear of collecting more NPAs. Hence, they have been too keen to lend to households. On the face of it, such lending is perceived less risky as the average loan size is small and usually secured. However, repayments and failures also depend upon the health of household incomes. A rising rate of default usually shows that incomes are stretched relative to the quantum of repayments required; note that interest rates haven’t really fallen at bank levels even though the monetary stance has eased. Apart from pre-loan screening and monitoring issues on the part of banks, there is also a concern that disposable income growth has possibly not matched up to expectations at the time of lending.
With the asset quality of commercial banks, particularly public sector banks, at alarming levels of deterioration—the gross NPA ratio jumped to 7.6% from 5.1% between September 2015 and March 2016—a fresh round of NPAs in portfolios that were healthy so far is the last thing the banks or, for that matter, the economy needed. The fast-paced growth in retail loans always raised discomfort. With this early evidence of small borrower defaults, the strain of another round of fresh NPAs may be too much to bear.
Renu Kohli is a New Delhi-based economist