Why retail loans continue to grow amid a slowdown

  • India is in the midst of a consumption slowdown, which translates into an economic slowdown given that private consumption expenditure forms around three-fifths of the country’s economy.
  • Curiously, retail loans of banks continue to grow robustly. Mint probes this dichotomy.

How fast have retail loans of banks been growing?

The year-on-year (y-o-y) growth of retail loans of banks over the last two years has been in the range of 15-20%. In June 2019, the y-o-y growth in retail loans was a strong 16.6%. Retail loans primarily comprise home loans, vehicle loans, credit card outstanding, education loans and personal loans. The non-food credit growth in June slowed down to 11.1% in comparison to 13.1% at the beginning of the year. Hence, the continued robust growth of bank retail loans is surprising considering that there is enough evidence that consumption is slowing down.

Why are retail loans still growing at a strong pace?

The disbursal of housing loans by banks continues to grow at a fast pace. In June, the y-o-y growth of housing loans was at 18.9%. Housing loan growth has picked up more since the beginning of this year. This leads to an interesting dichotomy. For the last few months we have seen a fall in the sales of cars, motorcycles and scooters. Even mopeds are not selling, with their sales falling by 21.8% in June. Hence, what is puzzling in the prevailing economic environment is that if people are going slow on buying mopeds, how are they still willing to buy homes?

What proportion of retail loans is housing loans?

In July 2017, housing loans accounted for 51.8% of retail loans. In June 2019, they formed 52.7% of retail loans. This jump has led to the continued robustness in retail loan growth.

Which are the fastest growing loans under retail?

Credit card outstanding continues to grow at a fast pace. In June 2019, this segment grew by 27.6%. In 2018, it had constantly grown at higher than 30%. Personal loans in June 2019 grew by 23.2%. In late 2017 and early 2018, the segment had grown at higher than 40%. Therefore, the unsecured portion of retail loans is growing at the fastest pace. Hopefully, banks haven’t lowered their lending standards to ensure that these loan segments continue to grow at a fast pace.

What about vehicle loans?

In June, vehicle loans grew 5.1% year-on-year, down from 8.6% in January. Thus, the growth pace has dropped since the start of the year. Growth in this segment has been slow, but this comes despite vehicle sales falling across the spectrum. What then is the reason for the growth in vehicle loans? A possible explanation lies in the fact that people are trading down and buying second-hand vehicles, especially cars, and taking loans to finance those.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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