Bank credit growth may be at a five-year low, but still hasn’t reached the bottom. It won’t be the corporate loan book, but retail loans that could pull down growth in the coming months.
Indian banks have been chasing the retail customer over a decade now, since businessmen were busy deleveraging their balance sheets. Also, the retail customer turned out to be more disciplined in repayments with delinquencies being low. In the 10 years since 2008, retail loans on an average grew at a breakneck pace of about 20%, in some months even faster.
In fiscal year 2018-19, this fast-paced engine began to slow a bit. As of September, the growth came to about 17%. Part of this is due to banks’ own caution after economic growth data began to show a slowdown in consumption. As the sentiment around future employment and earnings soured, lenders realized that the retail customer could come under stress.
Indeed, delinquency rates have inched up in the unsecured personal loan space, although they are far from raising serious worry. Even so, bankers seem to have taken of note of this. If one pieces together the commentary from big banks during the September quarter, there seems to be a cautionary note setting in.
India’s biggest retail lender, HDFC Bank Ltd saw its retail loan book grow by 15% in the September quarter, lower than previous quarters.
Non-bank retail lender Bajaj Finance Ltd also witnessed a slowdown. In a conversation with Mint post quarterly results, the lender’s managing director Rajeev Jain said that festive season demand was not as good as expected.
Both lenders have tightened their risk filters on retail loans. HDFC Bank in an earnings conference call told analysts that it has tightened its filters and policies to chase better customers and to keep delinquencies in check.
Ergo, the sobering effect on loan growth cannot be ruled out.
“We believe the near-term growth will continue to taper down further and could pull headline banking system loan growth towards demonetization lows," analysts at Jefferies India Pvt. Ltd said in a note.
During demonetization, credit offtake had halted, as banks were occupied with handling the demonetized currency notes. Recall that during the demonetization quarter, loan growth crashed to 4%.
As of 8 November, credit growth was 8.1%. The drivers of loan growth for banks have been retail and small business loans so far. The corporate loan book has been growing in low single digits.
Given the concerns over consumption demand and employment prospects, banks cannot be faulted for their growing caution on consumer loans. The worst of credit growth deceleration is yet to come.