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Why bankers in India will never turn their backs on retail loans

Retail loans have had the least delinquency rates historically. Even during the 2008 financial crisis, retail loan defaults were not more than 2% of the industry’s portfolio. (Mint)Premium
Retail loans have had the least delinquency rates historically. Even during the 2008 financial crisis, retail loan defaults were not more than 2% of the industry’s portfolio. (Mint)

  • Bankers have continued to focus on retail loan growth despite pandemic’s adverse effects
  • Historically retail loans have had the least delinquency rates, considered positive by bankers

The pandemic has brought a slowdown in India’s retail sector, the most promising loan segment for its banks. But bankers are far from turning sour on them.

The pandemic forced Indians to curtail their spending and brought to a grinding halt a decadal growth spree in retail lending. But analysts and bankers believe that recovery in growth would be quicker in retail. Analysts at Kotak Institutional Equities drew on global trends and pointed out that retail loans have performed better over longer periods despite short-term shocks. “Within the loan segments that are likely to resume growth, we are still optimistic on the retail segment. The corporate loan book will grow but significant consolidation in the asset-heavy industries towards a few strong players limits this opportunity," they wrote in a note.

Holding up
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Holding up

Indeed, large Indian firms would be unwilling to borrow again after going through a deleveraging phase in the past five years. The revenues of mid-sized and smaller firms have been hit hard due to the pandemic and they are unwilling to pile on fresh debt. That brings us back to retail. Most bankers have continued to stress on their focus on retail loan growth despite the pandemic’s adverse effects.

What gives them confidence? One, retail loans have had the least delinquency rates historically. Even during the early-period stress resulting from the 2008 financial crisis, retail loan defaults were not more than 2% of the industry’s portfolio. Collecting repayments from individuals is easier than recovering loans from corporates.

The pandemic may have destroyed discretionary spending but Indians have not stopped opting for the convenient equated monthly instalments (EMI). Bajaj Finance Ltd, a leading non-banking financial company (NBFC) with a business model focusing on EMI purchase options to individuals, is already reporting a bounce back in growth. To be sure, its assets are not expanding anywhere close to the rate seen in the previous years. But, the growth has been better than expected. The cards subsidiary of State Bank of India (SBI), country’s largest lender,is also showing an uptick in spends. E-commerce has come to the rescue here and online spends for SBI Cards and Payment Services Ltd now contribute more than half of the total spends. For the December quarter, SBI Cards saw online discretionary spends towards services plummet 55% but those towards purchases of goods rose 53%.

Meanwhile, home loan disbursements of most banks have shown a sharp rise. SBI’s home loan disbursements have surged 23% in December. Indeed, within retail, the share of mortgages is expected to increase over time. Low lending rates and several sops to boost real estate sales have given the initial boost.

While conditions are friendly for retail loan growth, there are some challenges ahead. An increase in covid-19 cases in some states have resulted in lockdown, restricting mobility. If Indians are unable to move, they would be unable to spend. The nascent recovery in discretionary spending would peter out.

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