Economy
Mint Explainer: Should we worry about the rise and rise of retail lending?
Summary
Not just housing loans, credit card outstanding and other personal loans also have been rising as many consumers went into spend now-pay later mode. This while borrowings by industry have slowed
By November, bank credit given to individuals and households had climbed above ₹50 trillion, nearly half of which were housing loans. Personal loans, as these are referred to in RBI speak, were about 40% more than the credit of ₹36 trillion extended to industry, including small and micro enterprises, at that point.
If the impact of the merger of HDFC Ltd with HDFC Bank is excluded, bank credit to individuals and households stood at ₹46.13 trillion against ₹35.83 trillion given to industry. Gross credit as personal loans exceeded lending to industry in 2021-22 by about ₹2.2 trillion, and that gap widened to ₹7.64 trillion in 2022-23.
Mint explains the implications of the lower borrowing by industry, and what RBI’s real concern is with regard to the rise in retail loans?
What made bank credit to individuals exceed loans to industry?
Until the pandemic, credit to industry exceeded personal loans. However, growth in credit offtake by industry had been near stagnant since 2016-17, as borrowings by large industrial units were limited.
Actually, borrowings of industry fell in 2016-17 and 2017-18 from the levels of 2015-16. This was largely due to the tightening of lending norms by RBI as many companies were overleveraged and that posed a risk for the banking system.
Also, the disruptions caused by the demonetisation of the ₹500 and ₹1,000 banknotes on 8 November, 2016, and the implementation of the goods and services tax regime from 1 July, 2017 hurt demand in the economy and somewhat muted industry’s demand for credit.
In comparison, borrowings by individuals and households continued to grow, led mostly by robust growth in housing loans due to tax incentives, attractive interest rates, and the launch of affordable home projects.
Housing loan, which accounts for about half of the total lending to retail borrowers, has been growing at the rate of 13-19% since 2010-11, though it slowed to a single digit during the pandemic when household incomes took a hit due to salary cuts and job losses.
Credit card outstanding and other personal loans also have been rising as many consumers went into spend now-pay later mode. Growth of credit card outstandings, vehicle loans, loans against fixed deposits and gold jewellery, and other personal loans were also responsible for faster growth of borrowings by individuals and households.
Should we be worried about slower growth in borrowings by industry?
Industry borrows for working capital and investment. When economic growth slowed, investment needs shrank. Most manufacturing units were underutilising their installed capacity and therefore did not need to expand capacity. With growth reviving and capacity utilisation reaching about 75%, and as high as 80% in some industries, businesses are once again considering investing in both greenfield and brownfield projects.
Infrastructure spending by the government and the housing boom have given an impetus to steel, cement and other allied industries. Increased demand for passenger vehicles will also help steel manufacturers and component makers. When these manufacturers decide to add capacity, demand for bank credit will pick up.
However, there are worries for the makers of consumer goods, both durables and FMCG–farm incomes have been hit by crop failures and lower output. If there are no adverse weather conditions in the coming months ahead of harvesting of the winter crop, and the southwest monsoon brings adequate rain in summer, rural demand can be expected to improve.
Why is RBI worried about the rise in retail loans?
The largest component of borrowing by individuals and households is housing loans. The Reserve Bank of India is not worried about the growth of the home loan portfolio of banks as such lending is collateralised. Likewise for vehicle loans, where the vehicle is hypothecated with the bank. Lending against fixed deposits, gold jewellery and securities also involves relatively low risks.
However, the central bank is worried about the rising credit card receivables and unsecured personal loans. Credit card outstanding rose by over 32% in 2022-23 from a year earlier, as compared with a 21% growth in overall retail lending and 15% growth in total non-food credit.
At the end of November, credit card outstanding had risen by about 20% since the start of the financial year. As credit card outstanding is not collateralised, banks can suffer losses when customers fail to pay.
Similarly, other personal loans, which may be used to pay for weddings, vacations, medical treatment, clear credit card bills, home renovation, or even to start a sole proprietary business, can be risky for banks if borrowers fail to repay.
Other personal loans account for about 28% of retail lending, and it grew by about 27% in 2022-23. At the end of November, it was up 11% from March levels.
How is RBI addressing the growth of unsecured retail loans?
RBI tightened regulations for unsecured lending in November by increasing risk weights by 25 percentage points for certain components of consumer credit exposure. Banks will have to make additional provisioning to cover for risks arising from default in repayment of such borrowings. This will make such loans more expensive and cool demand. RBI expects this measure will preserve the financial stability of banks.
