Banks may see higher retail loan slippages as inflation, job losses bite borrowers

Banks are continuing with the strategy to aggressively build their retail loan book. Lenders find retail loans safer compared with risky corporate loans because default rates are relatively lower.

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

What’s driving retail loan growth? 

In the July-September quarter, most banks reported a sharp rise in retail loans. HDFC Bank, for instance, grew its retail loan book by 21.4 percent against a 2 percent increase in corporate and other wholesale loans.

ICICI Bank reported 25 percent growth in retail loans on a Year-on-Year (YoY) basis. State Bank of India’s retail personal advances alone grew by nearly 19 percent YoY in the quarter.

Not just that, a majority of banks have guided that the share of retail loans on their book will be higher than corporate loans in the coming quarters.

IDBI Bank’s Deputy Managing Director Suresh Khatanhar told Moneycontrol that the bank is looking at diversifying to other products apart from mortgage loans. These include auto loans, personal loans and education loans.

Bank of Baroda’s Managing Director Sanjiv Chadha said that from a risk-management viewpoint it is better to have a higher proportion of retail than corporate loans.

“I would expect that our growth in retail would continue to outstrip corporate growth for a few quarters, going ahead,” Chadha said.

COVID-hit economy recovers 

According to bankers and analysts, the primary reason why banks are bullish on retail loan growth is that the COVID-hit economy is seeing signs of recovery.

There has been a revival in consumer spending, credit growth has picked up and banks’ collection efficiency has improved.

According to data from the Reserve Bank of India (RBI) for September, personal loans jumped 19.6 percent YoY, compared with 13.2 percent a year back.

Within retail loans, credit card outstanding loans has risen sharply by 27.2 percent, compared with 11.3 percent in the previous year.

“We believe banks have focussed on retail for some time as capex demand is weaker and not secular. It does imply confidence in the retail book and some opportunities after the coming off of bottlenecks in some sectors like auto,” said Hemali Dhame, associate vice president – research at Kotak Securities. “On a low base, revolving rates are lower, implying credit card (lending) could be aggressive.  Home loans remain a strong proposition as well.”

Also read: What is causing the sudden surge in banks’ education loan books? 

Asset quality woes ahead? 

The key question to ask is whether these loans will prove to be risky for banks. These loans 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 could turn bad and create for problems for banks.

“Although the delinquency levels in aggregate consumer credit (across all categories) have declined in the last fiscal year for both public and private sector banks, with inflation still being high and without sustained growth in wages and job creation, there is a risk of consumers’ repayment capacity being hurt,” Abhishek Kumar, associate fellow, and Divya Srinivasan, research analyst, at Centre for Social and Economic Progress (CSEP), wrote.

Inflation has been the buzzword in the economy. Persistently higher inflation has been the pain-point not just for the RBI, but also for borrowers. The RBI has hiked the repo rate by 190 basis points since May to curb inflationary pressure. Banks are quick to pass on the impact of rate hikes to customers.

Buying power 

High inflation, on the other hand, erodes the purchasing power of borrowers and erodes their disposable income. That apart, instances of job losses have been quite high and that could hurt the repayment capacity of borrowers.

The RBI has failed to meet its price mandate, with the latest Consumer Price Index (CPI) inflation for September confirming a third straight quarter in which average inflation has stayed outside the tolerance band of 2-6 percent.

According to data released by the Ministry of Statistics and Programme Implementation on October 12, headline retail inflation rose to 7.41 percent in September from 7.00 percent in August.

Already, some banks have seen higher retail slippages in the July-September quarter. For instance, Bank of Baroda’s fresh retail slippages rose to Rs 585 crore compared to Rs 451 crore last year and Rs 575 crore in April-June.

Bankers said that although risks persist, the overall asset quality of banks is healthier, enabling them to absorb such stress.

“Right now, the focus for banks is to grow the retail book and gain a share of the pie. Yes, incrementally stress can crop up; we are even bracing for some slippages but you have to remember that overall health of the banks have also improved,” said a banker with a state-run bank on condition of anonymity.

The banker added that retail loans are generally small ticket loans, and with tighter underwriting practices, adequate provisions and early warning signals could help banks prevent huge asset quality risks.

Kotak Securities’ Dhame said that there is little evidence of high retail slippages as yet, and the trend will only become visible with time.

“We may (have to) wait to see a few more signs. Banks balance sheets are stronger now and these loans are granular, which is de-risking for the banks,” added Dhame.