Banks should redesign their mix of secured and unsecured lending to take care of their assets, TransUnion Cibil has said.
Demand for credit cards and personal loans is likely to rise with consumers looking for ways to bridge their payment obligations and cash flow problems, TransUnion Cibil has said, assessing the impact of the coronavirus outbreak on the reatil lending market.
There will be a sharp fall in discretionary spending as consumer sentiment will be negative and many companies will see their revenues fall, the credit information and insights company said in a report released on June 10.
“Despite the Indian government launching one of the largest economic relief packages in the world, the social, financial and economic impact of COVID-19 will be far-reaching and will lead to a realignment of the retail credit market,” said Abhay Kelkar, vice president of research and consulting for TransUnion Cibil.
The report warns of stress building up in the personal loan and credit card segment. Banks should redesign their mix of secured and unsecured lending to take care of their assets, says the report titled Retail Credit Outlook, Anticipating and Preparing for the Covid19 Impact on the Retail Credit Market.
Citing data from the Centre for Monitoring Indian Economy, Cibil says the unemployment rate jumped to 23.5 percent in May, which will affect consumer sentiments and their loan-servicing capabilities.
The lockdown and the economic problems it brought caused bigger damage to the service sector than manufacturing businesses, says the report.
It expects India’s GDP to contract in the first three quarters of 2020 followed by a 1.1 percent growth in the fourth quarter.
The pandemic has changed the operating models for banks and forced them to digitise a large chunk of their operations.
Looking at retail credit trends, Cibil says as the GDP plummeted to around 3 percent, the retail credit growth rate fell to 15 percent.
While new loan originations stopped after February, inquiries, too, tanked in April, though some came in in May.
It was only in 2012 that inquiries and new loan volumes picked up after the 2008-09 global recession, says the report.
Approval rates for home loans, loans against property, credit cards and personal loans dropped more than 10 percent. The fall was particularly sharp for personal loans at 30 percent.
Analysing this trend, the credit bureau said home-loan demand will be extremely low but that for personal loans will jump by 15 percent.
It will be driven by the need to bridge the personal finance gap, flexible products in this space and greater access via digital channels.
India has 5.7 crore credit cards, the Reserve Bank of India data.
While home loans will still be approved by banks, given they are secured assets, personal loans will be hard to come by because of their unsecured nature and competition from fintech firms.
Fintech startups claim to be able to process personal loans at a lower cost by leveraging technology.
Looking at the share of high-risk assets in different loan categories, Cibil found it had fallen for auto loans and loans against property and gone up for credit cards and personal loans. This could have been driven by aggressive marketing by big credit-card players and multiple fintechs entering the space.
The share of low-risk customers in credit cards has fallen while it hasn’t changed much for personal loans. It shows that credit cards as a segment have the highest risk as not only are there more risky customers but the number of safe customers has fallen.
Till 2019, delinquency rates had fallen for credit cards and risen for home and personal loans.
Looking at overall asset quality, personal loans, consumer durable loans and credit cards have low-income and high-risk customers. Home and auto loans and credit cards have high-income low-risk and more affluent customers.
On repayments, the report says among secured loans, home loans have the highest priority. In the unsecured segment, personal loans are on top.
Asset quality of credit cards and personal loans will be impacted the most and for home loans, it will be comparatively moderate.
Lenders would have to innovate their distribution channels and digitise and automate internal operations, Kelkar said.
For lending, banks should look for co-origination, use digital channels and analytics-driven risk models to decide on the right product mix between secured and unsecured, he said.