Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Time for a close look at the retail loan segment

It's not quite in the danger zone yet, but there is some cause for concern

It is well known that Indian banks have almost frozen industrial lending because of the massive pile of bad loans on their books. The recent quarterly financial results of troubled lenders such as UCO Bank is the latest proof, if any is indeed needed, about the extent of the loan mess. But is there an emerging problem in another part of the lending business that needs greater public attention as well?

Almost all the new bank lending in recent quarters has been through consumer loans. The sharp rise in lending to consumers may be driven by rising incomes, and thus a sign of resilient consumer confidence, but it is time that regulators also take a closer look at two potential problems. First, whether banks are using lax lending standards to accelerate loans to individuals at a time when corporate lending is sluggish. Second, whether the rapid growth in personal loans—and especially credit card debt—is an advance warning about deteriorating household balance sheets.

The stock market is clearly not worried. It has been celebrating the recent surge in consumer lending. One speaker at the recent mutual fund conclave hosted by this newspaper pointed out that the relative performance of individual bank stocks is better explained by the nature of the loan book rather than the ownership structure, or banks with strong consumer lending portfolios have done better than those heavily dependent on industrial lending.

Also, some of the banking slack has been taken up by the reinvigorated non-bank financial companies (NBFCs)—and here again, it is those that have strong consumer lending that are seeing the maximum investor interest.

As Amay Hattangadi and Swanand Kelkar of Morgan Stanley pointed out in these pages last month, the consumer lending portfolio of the top 12 NBFCs is now almost the same size (around $92 billion) as the corresponding retail portfolio of the top five private sector banks. NBFCs are estimated to account for a 44% share in automobile loans and a 52% share in loans against property.

Finally, the strong revival in microfinance company shares shows that these lenders too are growing rapidly for the first time since the crisis in Andhra Pradesh a few years ago. Some of the better-run microfinance lenders deserve credit for doing a lot of hard restructuring, and taking on board the criticism that came their way after excess lending in Andhra Pradesh first pushed poor borrowers into a debt trap and then sparked off a political crisis.

It is not our case that India is in the midst of a consumer loan bubble, but rather an advance warning that the rapid pace of loan growth in this segment should be taken seriously by regulators. Retail loans are a broad category. They include housing loans, vehicle loans, consumer durable loans, credit card outstandings, personal loans and educational loans. Default rates are usually low in most of these categories. Consumer debt in India is also low by international standards, at less than a tenth of gross domestic product.

But these macro realities should not be used to mask specific problems. First, the growth in retail loans is being powered by personal loans that are most sensitive to default. Second, the growth in household debt may be concentrated in specific categories rather than across the economy, as was the case during the microfinance crisis as well.

India had seen a similar acceleration in personal loans in the years before the 2008 global financial crisis. Banks later had to clean up the mess. State Bank of India economist Soumya Kanti Ghosh has shown that the share of personal loans in total loans has been rising over the past two years, though it is still below the 2006 peak. As he commented in a research report published in April: “Personal loans share is currently rising in the total loan portfolio which leads one to wonder if this increase suggests a movement towards a similar glaring situation as had happened prior to 2008 global crisis when share of personal loans increased in total… loans or does it portend a potentially brighter economic outlook ahead."

The lights are thus flashing amber rather than red; yet, they deserve attention.

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