MUMBAI: Indian banks saw more repayments than they lent in April this year. While in normal times, the first month of a new financial year does see repayments exceed loan offtake, it has rarely happened to retail loan book.
But this year, retail loans showed the biggest month-on-month fall in at least 13 years, a sign that Indian banks’ retail loan boom is coming to an end.
The Reserve Bank of India (RBI) began making disaggregated bank loan data public in 2007. Personal loan category shrank by ₹62,861 crore or 2.46% from the previous month. All categories from housing to credit cards saw a fall. The biggest fall was in credit card outstanding which shrank 10.28% while unsecured personal loans dropped 3.7%. Together, they contributed to more than half the fall in total retail loans.
What does this say about loan growth?
The fall indicates that fresh loan disbursements came to a grinding halt even as borrowers continued to pay back their equated monthly instalments. This was expected since quarantined Indians could spend only on essentials during the lockdown to curb covid-19 spread. In all likelihood, the month of May too would show a similar drop in retail loans.
What does this mean for lenders?
To start with, banks will face their toughest year in terms of loan growth as the most promising category - retail - goes for a toss.
Recall that most lenders were pushing retail loans for growth as corporate loan growth had almost dried up in the past four years. In fact, some public sector banks had nothing to show in terms of growth besides retail.
But that is not all. A bigger worry is that retail loans may take a longer time to bounce back given the uncertainties around employment and pressure on wages. Scores of companies have announced pay cuts while some have announced layoffs as well to bring down costs. Unemployment rate in India was at a massive 23.52% in April, according to Centre for Monitoring Indian Economy (CMIE).
Indians are unlikely to borrow for discretionary spending especially when they have been unable to spend on discretionary items for more than two months now.
That said, a brief spurt in discretionary spending may be seen once lockdown is lifted completely. While economists wonder how behaviour patterns may change, it is clear that a swift increase in retail loan growth would be hard to come by, at least in FY21.
The troubles don’t end here. Banks will have to reckon with the possibility of a rise in delinquency rates in retail loans. A slowdown of credit-induced consumption had been underway since last year when the covid-19 pandemic and the ensuing lockdown brought it to a complete halt. The pandemic has also endangered employment and by extension the loan servicing capacity of individuals. Ergo, delinquency rates are expected to rise although they may not be alarming yet.
Are there green shoots?
Over the weekend, the government put out a plan to restart activity across the country, leaving it to states to enforce the extent of lockdown they want to. While big cities remain largely under lockdown, most others will be back to normal activity with private offices allowed to work and shops allowed to open up.