Banks must look at NBFCs to know real retail loan stress
2 min read 24 Dec 2020, 09:33 AM ISTBanks need to only look at their non-bank peers to see the impact covid-19 has had on retail creditworthiness and demand for credit. A report by credit bureau Cibil TransUnion shows that stress among retail customers has increased.
PremiumImproving collections, recovery in credit demand and a less than feared impact on employment in the organized sector have emboldened banks to conclude that the pandemic won’t bruise their retail loan portfolio. Lenders may be right but ignoring some signs could be harmful.
Banks need to only look at their non-bank peers to see the impact covid-19 has had on retail creditworthiness and demand for credit. A report by credit bureau Cibil TransUnion shows that stress among retail customers has increased. The most important metric is the delinquency rates. Lenders have so far continued to have a sanguine outlook on retail credit’s worthiness. Indeed, historically retail borrowers have had a superior repayment track record. But the pandemic is an unprecedented shock and historic behaviour may not give answers. Cibil’s report highlights the difference between NBFCs and banks here too.
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NBFCs saw delinquency rates rise by 49 basis points year-on-year in August while public sector and private sector banks saw rates decline. We should note here that headline delinquency rates may not show the true picture given regulatory forbearance, and the lagged effect of financial impact of the pandemic. “The delinquency picture is complicated and will take time to emerge due to the lagged effect of financial conditions, relief programs supported by lenders, and shifts in the payment priorities of consumers," said the Cibil report.
Credit scores show a much needed peek here. Cibil gives credit scores that categorises borrowers into sub-prime, near-prime, prime, prime plus, and super prime with each category showing higher creditworthiness. Sub-prime is the riskiest credit while prime plus and super prime is the safest. The credit bureau’s analysis shows that downgrades from prime and prime plus into near prime and sub-prime increased. Also, upgrades from sub-prime and near prime to higher credit scores reduced. In essence, retail borrowers showed a dent in repayment capacity. To be sure, these findings are for all lenders and not just NBFCs.
What makes NBFCs more vulnerable is their high share in riskier credit. The stark difference between NBFCs and banks is the profile of customers they service. Non-bank lenders service a riskier set of customers than banks and have a large proportion of self-employed than salaried customers. They also tend to have a larger share of borrowers from the unorganised sector, where the impact of the pandemic has been severe.
Non-bank lenders saw a 9% decline in retail credit balances in August. This is not just a sign of risk aversion by lenders but also of continued stress among borrowers as well. Loan inquiries and approvals have hardly improved for NBFCs.
While banks have seen a sharp improvement in these rates, they have shown aversion to riskier credit such as personal loans, credit cards and loan against property. Much of these approvals have been secured home loans and auto loans.
Lenders still prefer retail loans and are chasing retail borrowers. But until NBFCs show a marked improvement in their metrics, holding to a thread of caution is prudent. After all, a chain is only as strong as its weakest link.
