Analysis | Are banks relying too much on personal loans for growth?

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There is an interesting trend in the latest credit growth figures released by the Reserve Bank of India.

Banks have been aggressively pumping money into personal loans to achieve growth, whereas corporate lending and other loans to industries have taken a backseat. This has major implications for the banking sector on the asset quality front. Let’s understand how.

Overall non-food credit growth in the first half of 2021-22 was primarily driven by personal loans – including home loans – and credit to the agriculture sector, according to the data from the RBI. In terms of the contribution of sectors in incremental credit on a year-on-year basis, personal loans accounted for 52.5 percent, followed by the agriculture sector at 22.2 per cent.

Credit growth in the personal loan segment accelerated to 12.1 percent in August 2021 from 8.5 percent a year ago, supported by special schemes of banks to support households during the pandemic. Credit to housing, the largest constituent of the personal loan segment, showed signs of recovery in the five months ended August, the RBI said.

Non-food credit growth increased to 6.8 percent on September 24, from 5.1 per cent a year ago.

Private banks

Within this segment, credit growth among public sector banks remained modest, while there was an uptick in the case of private banks, which provided 56.7 percent of the incremental credit extended by scheduled commercial banks on a YoY basis as of September 24.

The trend in industrial credit growth remained subdued, mainly due to a decline in advances to large industries, which account for more than 80 per cent of the loans extended to the sector.

Credit to medium, micro and small industries improved, benefitting from the government’s support measures for micro, small and medium enterprises and the enhancement of the emergency credit line guarantee scheme for Covid-19 affected sectors.

The prime drivers of overall credit growth to industry were infrastructure and textiles. Credit to textiles and chemicals and chemical products accelerated. Credit to infrastructure – which accounts for about 38 percent of industrial credit – also improved, led by loans to roads and airports. Credit growth to food processing, beverage and tobacco lost momentum, while credit to basic metal and metal products contracted.

According to the RBI data, credit growth to the services sector decelerated to 3.5 percent in August from 10.9 per cent a year ago, largely due to a slowdown in advances to nonbanking finance companies, which have been raising resources mainly from the money and debt markets.

Credit growth to transport operators, however, recovered in August after slipping into negative territory in April, the RBI data showed. Credit to the trade sector contributed 1.5 percentage points to the overall credit growth of the services sector in August.

The pick-up in credit growth, albeit slow and led primarily by private banks, is indicative of an early recovery in the economy and was aided by supportive measures announced by the government. However, the flipside is rising asset quality pressure on personal loans.

There has been increased pressure on the retail loan segments of banks of late. First-quarter numbers for HDFC Bank, the largest among private lenders, confirmed the stress building up in the retail loan division.

While slippages declined, incremental restructuring rose to 1.2 percent of the loan book. Incremental stress, as a consequence, remained stable on a quarter-on-quarter basis at 4.5 percent.

Total outstanding restructured loans, including one-time restructuring (OTR) schemes, stood at Rs 20,300 crore, or 1.7 percent of all loans. Personal unsecured loans accounted for about 81 percent of the round-2 restructuring, where the bank rejigged personal loans of 11 percent under OTR-2 compared with 5 percent under OTR-1.

The trend in HDFC Bank is likely to hold true for other banks, as Moneycontrol’s weekly column, Banking Central, highlighted on Monday.

More evidence may emerge in the next few weeks as banks disclose their loan restructuring numbers.