Cash cow to Achilles' heel: The transformation of consumer lending business

Weak demand and falling income to hit the segment

Stress in the consumer lending business, which was once a cash cow for banks and non-banking financial services, only seems to be intensifying, as statements and updates by these lenders suggest. A critical highlight in RBL Bank’s media statement regarding its business updates pertains to its credit card segment. “Acquisitions have stopped during the lockdown; only digitally sourced cards being booked,” said the private bank.

It added that credit card spends had declined 40 per cent during the lockdown, with the bank expecting a slight increase in credit cost in March. In a call hosted by UBS, HDFC Bank also said that card swipes had reduced in March.

All these point to the brewing stress in the consumer business (credit cards and personal loans, mainly unsecured) of banks and lenders. Bajaj Finance’s weak commentary added fuel to the fire, thus crushing hopes of a demand revival in the near term.

But how exacting can the pain be?

Analysts at UBS expect retail loan growth and collections to be hit due to social distancing and lower discretionary spend. “Banks exposed to the above will be hit the worst,” the brokerage adds.

While consumer finance is the mainstay of Bajaj Finance and Capital First (now IDFC First Bank), banks were late to the party.

Increasing weakness in traditional retail lending pockets, such as home loans and vehicle loans, prompted banks to diversify into consumer loans.

Among banks, HDFC Bank leads the segment, closely followed by ICICI Bank and Axis Bank. RBL Bank, too — with its tie-up with Bajaj Finance for credit cards — was steadily capturing the segment.

Rising income levels of consumers and their aspirational needs was the premise for lenders to ramp up this business. In addition, as lenders were targeting their existing customers, it didn’t matter if these were unsecured loans.

However, times have changed and banks are tightening their purses. With some sectors like airlines and food delivery facing job losses and salary cuts, the consumer lending segment suddenly appears the most vulnerable.

Analysts at Kotak Institutional Equities note that as of March 20, 2020, unsecured retail credit and consumer loan enquiries had dropped 10-29 per cent week-on-week, indicating a sharp drop in demand.

“While one could argue that there will be pent-up demand for discretionary spends that after the lockdown and the demand disruption is temporary, significant salary growth in the next 1-2 years still seems unlikely,” said an analyst from a domestic brokerage.

Therefore, even if demand revives, the layer of excessive spending seen prior to the slowdown may not return. “We won’t find people upgrading their mobile phones every six months or taking a loan for a lavish wedding or holiday,” the analyst says.

In short, the belief, even among bankers, is that the practice of relying on loans to enhance one’s lifestyle will take a backseat.

While part of the pain may be captured in the Q4 results of private lenders, analysts say the June and September quarter results will be critical, to assess the asset quality of these lenders.