Loans to individuals, or loans to individuals, may soon become the most important segment of the Indian credit market, removing the first place from industrial loans. Loans in the retail segment have gradually increased in share and the pandemic has accelerated their adoption. This is partly the result of the current anemia of lending to industry, and partly the growing habit of individuals to borrow to finance both basic and non-basic needs.
As of March 2012, retail loans accounted for around 18% of total loans outstanding at Indian banks. By March 2021, that figure had risen to 29%. By way of comparison, the share of loans granted to industrial entities of all sizes rose from 45% to 30%. Loans to individuals grew at a compound annual rate of 15.5% over this period, compared with 4.5% for loans to industry. Rebalancing accelerated after 2015 as consumer lending maintained its pace, while the growth rate of lending to industry fell below 2%, according to data from the Reserve Bank of India (RBI) .
During the covid-19 pandemic, only two of the four main borrowing segments were able to borrow more from banks than before, according to the data. Retail segment is one of them, the other being agriculture and related activities. Loans to the service sector and industry saw a decline during the pandemic.
A disaggregation of the origin of the growth in personal loans contains caveats, particularly in the context of the pandemic causing financial strains for households. For example, loans against gold jewelry and unsecured personal loans, especially low cost loans, have increased. These are provident loans, and are also more expensive for individuals and riskier for banks.
Signs of distress?
Individuals borrow to purchase assets, such as a home, where the asset provides a safety net against default. But they also borrow to finance deficits, and this is where the roots of the problems lie for both borrowers and lenders. Over the past decade, home loans have maintained their 50% share in loans to individuals. But there are three notable changes. First, education loans have lost share. Second, loans for gold have increased during the pandemic. Third, personal loans, which may not be backed by collateral, fell from 18% to 28%.
Personal loans are a rapidly growing segment even among non-bank lenders. According to a 2021 report by TransUnion CIBIL and Google, 69% of personal loans in 2020 were taken out by people under the age of 30. In addition, small loans are growing rapidly. Between March 2019 and March 2021, the number of accounts borrowing up to ₹25,000 from banks increased by 75%, compared to 31% growth for those who borrow between ₹25,000 and ₹10 lakh.
Private and government banks are seeing the shift from industry to retail. The change is more pronounced among state banks, however. The share of industry in their loan portfolio increased from 41% in June 2017 to 30% in March 2021, while the share of retail rose from 20% to 26%. For private banks, individuals represented 29% of their loan portfolio in March 2021.
One retail segment where government banks have overtaken private banks is personal loans, according to a December 2020 report on personal loans released by CRIF High Mark Credit Information Services, a credit bureau. While non-bank financial corporations (NBFCs) and fintech players register large volumes with small loans, banks lead the way in terms of value. In March 2020, public banks held 39% of personal loans and private banks 38%. In August 2020, while private banks held their share, government banks increased theirs to 42%.
The increase in credit to individuals is increasing the pressure on Indian household indebtedness. It’s not bad if the debt is used productively (such as for an asset purchase or an education that generates future income) and paid off. The total financial liabilities of Indian households as a percentage of gross domestic product (GDP) increased from 26% in June 2015 to 38% in December 2020. This figure is 80% for the United States and 62% for China. , according to data from the Bank for International Settlements (BIS), a group of central banks.
What could worry Indian banks is the rate of increase in this ratio during the pandemic. The quarters of June 2020 and September 2020 saw the largest increase in this ratio over the past 10 quarters.
With the pandemic and the fact that gold loans and unsecured personal loans are driving the increase in retail, defaults could hurt individuals and banks in the quarters to come.
(howindialives.com is a public data database and search engine)
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