How risky is the retail loan book of banks?
The share of unsecured personal loans in the overall retail loan book of banks is the highest in over a decade. In search of credit growth, banks are chasing the retail borrower like never before. While the overall retail portfolio has always been superior in its repayment record compared with the corporate loan book, some retail products attract a higher delinquency ratio—such as credit cards and unsecured personal loans. These are the high risk products among retail loans. They are also high yielding ones as interest rates on these are the highest among retail products.
The adjoining chart shows that of every Rs100 worth of retail loan that banks lent between April and January of 2017-18, nearly Rs50 went towards unsecured personal loans. Add credit card outstandings and it swells to Rs80. That is the extent of unsecured retail lending that banks have done during the current fiscal year.
Indeed, the share of unsecured retail loans has been rising in incremental credit offtake ever since demonetisation in November 2016. In 2016-17, out of every Rs100 lent to retail borrowers, only Rs35 was as unsecured personal loans. Nevertheless, the share of unsecured loans in the overall portfolio of retail loans is still under 30% and according to the Reserve Bank of India’s financial stability report, bad loans formed just 2.1% of retail credit as of September 2017. This ratio has remained largely unchanged over the last three years.