Retail lending can go wrong, but it doesn’t do much harm to banks

As the growth in bank lending to industry slowed dramatically over the past six years, retail lending has driven overall credit growth. The good thing is that bad loans are very low when lending to retail customers. Will it stay that way in the coming months? Mint drops by

What drove the growth in retail lending?

Between 2008-09 and 2014-15, banks took out a huge amount of non-performing loans on their industrial loans. A bad loan is a loan that has not been paid back for 90 days or more. This has resulted in a shift towards personal loans, which include home loans, vehicle loans, personal loans, outstanding credit cards, and loans to finance durable consumer goods. In March 2009, these loans accounted for 21.6% of total bank loans (non-food loans), but decreased to 18.3% by March 2014. In March 2020, they accounted for 27.7% of non-food loans. Lending to industry in March 2009 accounted for 40.5% of total bank lending. By March 2020, this value had dropped to 31.5%.

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Which retail loans drove growth?

On an absolute basis, home loans made up the bulk of the growth. Even in 2019-20, which is considered a bad year for real estate, home loans issued by banks rose 16.4%. One explanation for this is that non-banking finance companies (NBFCs), which also make home loans, had a bad year; for example, the banks’ housing loans continued to grow. Home finance companies are NBFCs. Personal loans and outstanding credit cards have also increased, albeit on a lower basis. In 2019-20, they grew by 20% and 22.5%, respectively, while the overall growth in bank lending was only 7.6%. These are unsecured loans for which the borrower has not offered any collateral.

What made the banks so enthusiastic about personal loans?

In September 2019, the non-performing loan rate for retail lending was 1.8%, while industrial lending had a non-performing loan rate of 17.3%. This made lending to private customers attractive for banks. Analysts who follow the banks expect the bad loan rate on retail lending to rise now. As salaries and incomes fall, people lose their jobs, and companies close, the likelihood that people will default on those loans increases.

Will there be an increase in home loan defaults?

Despite the negative impact Covid-19 has on the economy, significant home loan defaults are unlikely. Because living in your own home brings physical, social and emotional security with it. Also, the banks don’t finance the full price of a house. Typically the financing is around 65-70% of the price or even less. Therefore, even in the event of a default, banks can sell the house and collect their outstanding loan. The problem will be with unsecured loans like personal loans and outstanding credit cards.

Will unsecured bank loan defaults increase?

As many workers lose their jobs or lose income, personal loan and credit card defaults can increase. It is easier for borrowers to break away from these loans that have no collateral than it is from a home or vehicle loan. However, outstanding credit card and personal loans make up only 9% of total bank loans. Even if there are defaults, the banks won’t have much trouble. The larger defaults could continue to exist on loans to industry.

Vivek Kaul is an economist from Mumbai.

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