Are banks abandoning caution in chasing retail loans?

The share of unsecured retail loans, including credit cards, to Indian banks’ total retail book is at 28%, its highest level since Reserve Bank of India (RBI) began releasing disaggregated credit data in 2007. This should send off warning signals to banks and it has begun to do so, at least to the RBI. The central bank’s deputy governor S.S. Mundra recently noted that banks should not be pursuing the retail borrower at all costs.

Indian banks have been chasing the retail borrower ever since signs emerged as early as 2012 that corporate loans could see a faster rate of decay and that loan demand from companies would halt soon. This chase has intensified in the last three years when corporate loan demand dried up and defaults began piling up to reach an unsustainable level.

Private lenders like ICICI Bank and Axis Bank have resumed unsecured lending with gusto and their public sector peers have jumped on the bandwagon as well. So much so that while overall retail credit registered a compounded annual growth rate of 17.2% over the last three financial years, unsecured retail loans have grown at a faster rate of 23.8%.

A look at the RBI data shows that unsecured loans (categorized as “others” in the data) stands at Rs4 trillion as of June and adds up to over Rs4.5 trillion when credit card outstanding is included. The rise in credit card outstanding has been faster mainly in the aftermath of demonetisation, indicating that individuals fell back to credit after their cash holdings were demonetised. “What we are unable to figure is the ‘others’ (not qualified by RBI) which has seen a very significant jump even as the overall loan pie has started slowing down. While we could be overly concerned, the charts certainly look worrying,” a research note by Jefferies India Pvt. Ltd said.

Faced with unprecedented competition, the largest pile of bad loans ever and the demand for corporate loans drying up, it is but natural that lenders of every ilk would try to claw in as much growth through whatever geographic or economic segment of borrowers they can. And the retail borrower looks to be the answer as extracting repayment from individuals is far easier than from a company during times of default. Perhaps lenders are becoming smug in their retail business and need to look back to 2008, when credit card defaults had risen sharply, to understand that all retail lending is not secure.