Banks must hit a ‘pause’ on retail loans

Both Report on Banking Trend and Progress in India 2020-21 and the Financial Stability Report (December 2021) highlight consumer credit as a driver of recent credit decline. The latter report also suggests that “subprime” borrowers (CIBIL credit score below 680) are on the rise in consumer credit.

In this context, it is worth quoting from a speech given at the National Institute of Bank Management, Pune. on April 18, 2018 by NS Vishwanathan, then Deputy Governor of the RBI: “A herd movement seems to be establishing itself among bankers to expand personal credit and the private credit segment. This is not a risk-free segment, and banks shouldn’t consider it the big panacea for their troubled corporate loan book. Here, too, there are risks that should be appropriately assessed, priced and reduced. “

This view was also expressed in the Report on Banking Trend and Progress in India 2018-19. More importantly, the document forward-looking warned that “this strategy of diversification (from corporate to personal credit), while useful as a risk reduction tool, has its own limitations: the slowdown in consumption and overall economic growth can drive demand for and quality of private customer loans. “

With this in mind, let’s take a look at the impact of personal loan growth (PLs) growth on (a) borrowers’ indebtedness and (b) their sustainability from the perspective of banks.

PLs became the trend of the season for banks from the 2000s, largely due to the need to diversify credit risk after many non-performing assets (NPAs) are common with large exposures. As shown in Figure 1, the regular commercial banks’ outstanding PLs increased at an average annual growth rate (CAGR) of 15.3 percent in the 2012-21 decade, outperforming the CAGR of non-food loans (NFLs) by 9.4 percent per decade . Cent.

In order to evaluate the debt of private households, the indices of the outstanding PLs, the gross domestic product (GDP) and the gross domestic savings of the household sector (GDS-HH) were created, all at current prices, with the 2012 financial year serving as the basis (= 100) . .

Graph 2 clearly shows the rapid growth of the PLs opposite to GDP and GDS-HH respectively. The divergence between the growth path of PL and that of BIP and GDS-HH has increased significantly from FY16. The rapidly growing divergences do not bode well for borrowers ‘ability to repay and can therefore adversely affect the stability of banks’ PL portfolios. Increased borrower debt combined with a likely rise in NPAs has the potential to ultimately frustrate the sustainability of PLs. Since the RBI data only includes credit cards issued by banks, not their subsidiaries / joint ventures, the scenario could become bleak if all outstanding credit cards are taken into account.

Figure 3 shows the rough gross NPA ratios (GNPA) of the banks in relation to the PLs. The graph shows an increasing trend in the GNPA ratios. For both banking groups together, the rate from FY17 was over two percent. PSBs, which reported much higher rates than private banks, stayed well above two percent for the entire seven-year period and were three percent in FY17 and FY21.

Due to the economic slowdown, stress had built up in PLs from 2019-20: H1. The pandemic and moratorium added to the stress. This resulted in prominent private banks selling toxic retail assets to ARCs.

According to a PWC report (May 2021), “increasing layoffs, deferrals / wage cuts, higher unemployment and declining economic activity due to lockdowns contributed to significant short-term liquidity shortages for many middle- and low-income borrowers …”

The pandemic stress is far from over, and the effects of the disruptions will be felt in the years to come.

The obviously unplanned growth path of PLs needs to be put on a leash before it goes wrong. Conventional measures – ie the assessment before and after the sanction, as well as monitoring and follow-up – would not be enough on their own. Some unconventional moves, as discussed below, would not only benefit banks but also calm the likely indebtedness of borrowers. Cross-country studies show the harmful societal and psychological effects of excessive indebtedness from the rapid expansion of consumer credit.

Banks need press the pause button and lock their position before another phase of PL growth begins.

Banks need design potential-bound plans by weaving in suitable macroeconomic variables such as disposable income, employment situation and inflation on the one hand and bank-specific variables on the other. For example, higher inflation increases the loan amount, but at the same time reduces households’ disposable income and savings, which makes it difficult for them to service loans.

In view of the high level of debt illiteracy and the exuberance of accepting modern living standards, these aspects are becoming more important.

Interbanks Coordination is important so that goals set on a silo basis at bank level do not become untenable when aggregated. There are ways to address this optimization problem.

concentration the PLs must be observed – according to geography, target groups, segments, etc.

Banks need Prefer borrowers whose salary or income accounts are linked to their loan accounts for repayment.

popularization Credit cards are welcome, but the risk of increased debt cannot be overlooked, a phase in which many developed countries are embroiled.

it is It is encouraging to note that the Bankruptcy and Bankruptcy Code is considering measures to facilitate access and reduce the time and cost of bankruptcy proceedings for individuals. At the same time, the market infrastructure for an effective sale of PL-financed assets should be promoted.

The role Financial literacy and household-level credit advice are no longer ignored in order to foster a solid credit culture among existing and potential personal borrowers.

To sum up, preoccupation with weakening NPAs for corporate lending should not lead banks to forget the problems posed by the over-reliance on PLs as risk diversifiers and income generators.

He’s a former senior economist at SBI and Rath is a former chief general manager at RBI. Views are personal


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