Retail loans may go bad, but they won’t hurt banks a lot.

When bank lending growth to industry slowed down sharply over the past six years, lending to the retail sector boosted overall credit growth. The good news is that outstanding loans in retail banking are very low. Will it stay that way for the next few months? The coin’s looking.

What has been the impetus for growth in lending to private individuals?

Between 2008-09 and 2014-15, banks provided a large number of impaired loans in industrial loans. A bad credit is a credit that has not been repaid within 90 days or more. This has led to a shift towards personal loans, including home loans, vehicle loans, personal loans, credit card loans and sustainable consumer loans. In March 2009, these loans represented 21.6% of total bank loans (non-food loans), but fell to 18.3% in March 2014. In March 2020, it accounted for 27.7% of non-food appropriations. Industrial loans accounted for 40.5% of total bank loans in March 2009. By March 2020, this figure had fallen to 31.5%.

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Which retail loans have stimulated growth?

In absolute terms, most of the growth is due to loans for the purchase of a house. Even in 2019-20, which is considered a bad year for real estate, bank home loans increased by 16.4%. One of the reasons for this is that non-bank financial institutions (NBFCs), which also grant home loans, had a bad year, which meant that bank home loans continued to increase. Housing finance companies are NBHCs. Personal loans and credit card debt are also increasing, albeit on a lower basis. In the period 2019-20 they increased by 20 percent and 22.5 percent respectively, while the total growth of bank loans was only 7.6 percent. These are unsecured loans and the borrower has offered no collateral.

Why are banks so obsessed with personal loans?

In September 2019, the percentage for non-performing loans to individuals was 1.8%, while the percentage for non-performing loans to industrial companies was 17.3%. This has made lending to private customers attractive to banks. Analysts monitoring the banks believe that the percentage of bad debts for retail customers will now increase. As wages and incomes fall, jobs are lost and businesses close, people are more likely to default on these loans.

Will defaults on home loans increase sharply?

Despite the negative impact of Kovid-19 on the economy, it is unlikely that there will be significant defaults on home loans. This is because life at home goes hand in hand with physical, social and emotional security. The banks don’t finance the full cost of the house either. Usually the financing is about 65-70% of the price or less. This means that even in case of default, the banks can sell the house and recover the outstanding loan. The problem concerns unsecured loans such as personal loans and outstanding credit cards.

Will the number of defaults on unsecured bank loans increase?

As many workers lose their jobs or face loss of income, defaults on personal and credit card payments may increase. It is easier for borrowers to waive these loans if there is no collateral than a house or car loan. However, outstanding credit card and personal loans represent only 9% of total bank loans. Even in the event of non-payment, the banks will not have serious problems. Significant defaults can still be associated with loans to industry.

Vivek Kaul is an economist from Mumbai.





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