Bank loans to individuals are on the verge of leapfrogging loans to industry to become the largest segment in the credit book of Indian banks. The rise highlights the anaemic lending to industry and also contains potential new threats to Indian banks
Retail loans, or loans given to individuals, could soon become the largest segment in India’s credit market, taking away the top spot from industrial loans. Loans in the retail segment had been progressively growing in share, and the pandemic has accelerated their adoption. This is partly the result of the current anaemic lending to industry, and partly the growing habit of individuals to borrow to fund both essential and non-essential needs.
As of March 2012, retail loans amounted to about 18% of the total loans outstanding in Indian banks. By March 2021, this had increased to 29%. By comparison, the share of loans given to industrial entities of all sizes has dropped from 45% to 30%. Retail loans grew at a compounded annual rate of 15.5% in this period, against 4.5% for loans to industry. The rebalancing accelerated after 2015 as retail loans maintained their pace, while the growth rate in loans to industry fell below 2%, showed data from the Reserve Bank of India (RBI).
During the covid-19 pandemic, only two of the four main borrower segments have managed to borrow more from banks than earlier, the data showed. The retail segment is one of them, the other being agriculture and allied activities. Loans given to the services sector and industry saw a decline during the pandemic.
A disaggregation of where the growth in retail loans is coming from holds some cautionary tales, especially in the context of the pandemic causing financial stress to households. For instance, loans against gold jewellery and unsecured personal loans, especially small-ticket ones, have increased. These are contingency loans, and are also more expensive for individuals—and more risky for banks.
Individuals borrow to purchase assets, such as a house, where the asset provides a safety net from default. But they also borrow to fund shortfalls, and that’s where the roots of trouble lie for both borrowers and lenders. Over the last decade, housing loans have maintained their 50% share in retail loans. But there are three notable changes. One, education loans have lost share. Two, loans against gold spiked during the pandemic. Three, personal loans, which may not be backed by collateral, have shot up from 18% to 28%.
Personal loans are a fast-growing segment, even among non-bank lenders. According to a 2021 report by TransUnion CIBIL and Google, 69% of personal loans in 2020 were taken by individuals aged below 30 years. Further, small-sized loans are seeing brisk growth. Between March 2019 and March 2021, the number of accounts borrowing up to ₹25,000 from banks increased 75%, against 31% growth for those borrowing between ₹25,000 and ₹10 lakh.
Both private and government banks are seeing the shift from industry to retail. The shift is, however, more pronounced among government banks. The share of industry in their loan book has dropped from 41% in June 2017 to 30% in March 2021, while the share of retail has increased from 20% to 26%. For private banks, retail comprised 29% of their loan book in March 2021.
One retail segment where government banks have leapfrogged private banks is personal loans, according to a December 2020 report on personal loans by CRIF High Mark Credit Information Services, a credit bureau. While non-banking finance companies (NBFCs) and fintech players are registering brisk volumes with small-sized lending, banks lead in value terms. In March 2020, government banks had a 39% share in personal loans and private banks 38%. In August 2020, while private banks held their share, government banks increased theirs to 42%.
The rise in retail lending is increasing the debt pressure on Indian households. This is not bad if the debt is used productively (such as for an asset purchase or an education that yields future income) and repaid. Total financial liabilities of Indian households as a share of gross domestic product (GDP) have increased from 26% in June 2015 to 38% in December 2020. This figure is 80% for the US and 62% for China, according to data from the Bank for International Settlements (BIS), a grouping of central banks.
What might be of concern for Indian banks is the pace of increase in this ratio during the pandemic. The June 2020 and September 2020 quarters registered the biggest increase in this ratio in the last 10 quarters.
Given the pandemic, and the fact that gold loans and unsecured personal loans are driving the increase in retail, defaults could hurt individuals and banks in the quarters to come.