Indian commercial banks' retail lending has risen faster than loans to large businesses since the COVID-19 pandemic, S&P Global Market Intelligence data showed, underscoring the central bank's concerns about unsecured loans.
Retail loans was the fastest-growing segment among the three biggest private sector lenders, and among their state-owned peers, since at least the fiscal year ended March 2021, Market Intelligence data showed.
An example of this is State Bank of India, the country's biggest lender by assets, where retail loans grew 42.7% to 12.43 trillion rupees by Sept. 30, 2023, from 8.71 trillion rupees as of March 31, 2021. Credit to corporates was up 19.4% over the same period. The bank's public sector and private sector peers — such as Bank of Baroda Ltd., where retail loans increased 61% in the same period, and Axis Bank Ltd., where retain loans rose 57% — showed a similar trend, the data showed.
Retail loans are made up of housing loans, consumption loans for the purchase of durables, auto loans, credit cards and educational loans.
The Reserve Bank of India (RBI) raised concerns over unsecured advances, a risky segment of retail loans, as the proportion of such advances increased to 35% in 2023 from 25% in 2007, according to a Jan. 18 research paper from RBI employees. Housing loans, which make about half of retail loans, have stayed relatively stable in that period, the central bank employees said.
"Both the secured and unsecured components [of retail loans] have registered growth rates higher than overall bank credit growth," the paper said, noting that the "surge in retail credit" has continued even after the central bank withdrew the temporary measures introduced to help households during the pandemic.
Strong economic growth in India has prompted high demand for credit in the country. Unsecured loan growth grew as demand for credit increased in the post-COVID era, and banks' lending moved toward the retail loans segment. Bank credit rose 15% in the financial year ended March, 31, 2023, led by personal loans, which registered a growth of 20.6%, RBI data showed. Loans to the industry, however, grew only 5.7% in this period.
"We expect Indian banks loan growth to stay somewhat in line with the trajectory of nominal GDP, and loan growth to the retail sector to continue to exceed that of the corporate sector," said Deepali Seth Chhabria, an analyst at S&P Global Ratings. "Corporate borrowing is also picking up momentum, but the uncertain environment may delay capital expenditure-related growth."
India continues to be one of the fastest-growing major economies in the world due to the country's robust domestic consumption, high public capital expenditure, a recent upturn in private investment and strong exports of services. India's gross domestic product expanded 7.7% year over year in the fiscal first half ending March 31 and closed the calendar year with 7.0% growth, according to the RBI.
RBI's response
The fast growth of unsecured loans prompted the central bank in November 2023 to increase risk weights on unsecured personal loans, credit cards, and lending to nonbank financial companies by 25 percentage points. Risk weights refer to the capital banks keep aside as provisioning to cover any loan defaults.
"We believe retail growth should moderate hereon, given the RBI’s recent action on unsecured loans, which has been the key growth driver and, thus, should lead to some moderation in overall credit growth as well," brokerage Emkay Global wrote in a Jan. 10 report.
RBI governor Shaktikanta Das highlighted during his monetary policy address in October 2023 that certain components of personal loans were recording "very high growth," and advised banks and nonbank financial companies to strengthen their internal surveillance mechanisms. Outstanding debt on credit cards rose 31% in the financial year ended March, 31, 2023, according to central bank data.
Still, the proportion of retail loans as a percentage of domestic loans has increased only slightly at the six banks in the Market Intelligence sample, the data showed. HDFC Bank Ltd. was an exception among the major banks as its retail loans jumped in the wake of its merger with parent Housing Development Finance Corp. Ltd., a home finance company.
The RBI employees said in their research note that, on average, five banks contributed 60% of the incremental retail credit between 2017 and 2023. In recent years, the incremental growth contribution from the dominant banks has decreased, they said.
While the average size of credit was higher for highly-rated borrowers, in the case of credit cards the credit outstanding was higher for below-prime borrowers, suggesting a higher flow of credit to relatively riskier borrowers, according to the report.
The structure and composition of the retail credit has not undergone any systemic shift, and asset quality parameters have shown an improvement.
"Therefore, it is expected that pandemic related stress, if any would have not materially impacted the credit growth and asset quality trends in retail credit segments," the RBI staffers wrote in their paper, adding, the trends "underscore that it is imperative for banks and other financial service providers to monitor the retail segment closely and continuously for any undue build-up of stress."
The central bank said in a disclaimer that the employees' views were personal.
