Banking Central | Will aggressive retail loan drive boomerang on banks?

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One cannot ignore the aggressive retail loan growth reported by some of the major lenders in the second quarter this year. HDFC Bank, to give an instance, grew its retail loan book by 21.4 percent. That’s against a 2 percent growth in corporate and other wholesale loans.

For Housing Development Finance Corporation (HDFC), too, the rate of growth in individual loans was 20 percent - much faster than the rest of the book. Now, take the case of ICICI Bank, HDFC Bank's closest contender. Its retail book zoomed by 25 percent on a year-on-year basis, now contributing 54 percent to the total loan book. Other big lenders too show largely a similar trend. Every single banker wants to have a pie of retail loans.

Going by the Reserve Bank of India data for September, for the industry too, personal loans are growing at a faster clip with 19.6 percent spike in September, compared with 13. 2 percent a year back. Within retail loans, credit card outstanding has picked up sharply by 27.2 percent, compared with 11.3 percent in the previous year, while there is a massive jump in education loan portfolio as well—from just 1 percent to 12 percent within a year. Consumer durables continued to gallop by 61 percent in September on on-year, compared with 51 percent in the previous 12 months period.

Why such a huge jump? One reason is the big revival in spending after a dull pandemic period. People have started moving out of their hometowns to big cities as businesses start to function regularly and public places get back to usual business activity. Second, the festive demand that was subdued at the worst phase of pandemic has contributed greatly to the jump in retail loans. Third, students have yet again started to look at foreign universities for professional courses with Covid-related travel restrictions being lifted. This has created a big demand for education loans. Fourth, banks too have embarked up on a major sales campaign to lure retail borrowers with goodies like lower interest rates and fee waivers. Banks find retail loans as much safer bet compared with risky corporate loans as default rates are relatively lower.

Having said that, the aggressive retail loan growth—mainly in non-asset generating consumer loans and credit card loans—also carry a high risk in an economic downturn. In the event of a major global economic slowdown, accompanied with high interest rates and massive job losses, these loans will face the acid test.

A majority of the individual loan borrowers are dependent on salaries and job cuts would have catastrophic effects on asset quality particularly for those loans that aren’t backed by collaterals. Simultaneous rate hikes by central banks across the world have reignited the risks of a global recession.

High inflation makes it extremely difficult for central banks globally to not hike interest rates, including in India. Liquidity situation is tight, making lenders extremely choosy about borrowers.

Big global corporations across the world, including Twitter and Meta (reportedly) are cutting jobs possibly due to recession fears and impact on revenues. In India too, the ripple effects are likely. This could start with a few startups and later mid-sized companies if interest costs stay elevated for a prolonged period and world economy slips into a recession prompting big investors to pull back to their home markets.

Other risk for Indian banks is the end of the Covid-era loan repayment holidays permitted to borrowers that would have come to an end by now. As repayments begin, the stress will emerge wherever cash flows aren’t back yet.

Large corporate loan stress is largely accounted for by the Indian banks with many cases now written off and pushed to bankruptcy courts. The banks are extremely cautious while lending to companies other than those with AAA ratings after the last round of bad loan shock. The next real test is in the retail book. A clearer picture on retail loan asset quality will emerge over the next few years.Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.