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Home / Industry / Banking /  Retail loans may go bad, but won’t hurt banks much

As the growth of bank loans to industry slowed down dramatically in the last six years, retail loans have driven overall loan growth. The good part is that bad loans in retail lending are very low. Will that remain the case in the months ahead? Mint takes a look

What has driven the growth in retail loans?

Between 2008-09 and 2014-15, banks ran up a huge amount of bad loans in their industrial lending. A bad loan is a loan that hasn’t been repaid for 90 days or more. This led the shift towards retail loans, which include housing loans, vehicle loans, personal loans, credit card outstanding and loans to finance consumer durables. As of March 2009, these loans formed 21.6% of overall bank loans (non-food credit), but fell to 18.3% as of March 2014. As of March 2020, it accounted for 27.7% of non-food credit. Loans to industry formed 40.5% of total bank loans as of March 2009. By March 2020, this figure had fallen to 31.5%.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

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Which retail loans have driven growth?

On an absolute basis, housing loans have driven the bulk of the growth. Even in 2019-20, said to be a bad year for real estate, housing loans given by banks grew 16.4%. One explanation is that non-banking finance companies (NBFCs), which also give out home loans, had a bad year; so bank housing loans kept growing. Housing finance firms are NBFCs. Personal loans and credit card outstanding have grown too, albeit on a lower base. In 2019-20, they grew 20% and 22.5%, respectively, when overall bank loan growth was just 7.6%. These are unsecured loans, with the borrower having offered no collateral against them.

What made banks so gung-ho about retail loans?

As of September 2019, the bad loans rate of retail loans was 1.8%, whereas lending to industry had a bad loans rate of 17.3%. This made retail lending compelling for banks. Analysts who follow banks believe the bad loans rate of retail loans will now rise. As salaries and incomes fall, people lose jobs and businesses shut, the likelihood of people defaulting on these loans will go up.

Will there be a jump in home loan defaults?

Despite the negative impact of covid-19 on the economy, significant home loan defaults are unlikely. This is because living in one’s home comes with physical, societal and emotional security. Also, banks do not fund the full price of a house. Typically, the funding is around 65-70% of the price or even lower. Hence, even in case of a default, banks can sell the house and recover their outstanding loan. The problem will be with unsecured lending such as personal loans and credit card outstanding.

Will unsecured bank loan defaults go up?

With many salaried individuals losing their jobs or seeing drops in income, defaults on personal loans and credit cards may go up. It’s easier for borrowers to walk away from these loans, where there is no collateral, than it is from a housing or vehicle loan. However, credit card outstanding and personal loans form only 9% of overall bank loans. Even if defaults occur, banks won’t face much trouble. The bigger defaults might continue to be on loans to industry.

Vivek Kaul is a Mumbai-based economist.

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