Retail loans show early signs of stress after years of quick growth

Every asset pool will have to pass through the test of quality. Retail loans being the fastest growing segment in the last five years may be no exception. As first signs of caution, a few months ago managements of HDFC Bank, Axis Bank and Bajaj Finance indicated that they are turning watchful on the segment. 

Some like HDFC Bank set aside more provision towards retail loans, particularly unsecured loans in June quarter (Q1), while for ICICI Bank the pool of troublesome retail loans is on the rise at 1.9 per cent gross non-performing assets ratio in Q1. Data indicate that the calendar year 2018 threw up numbers which were slightly higher than the comfort level (see charts).

Suresh Ganapathy of Macquarie Capital believes that while there may be no build-up of stress in retail credit waiting to blow-up, worries are definitely increasing given the growth slowdown and rising unemployment in the country. 

Ashish Singhal, Managing Director, Experian Credit Information Company of India, though, says that in the current credit cycle, being cautious on personal loans and loan against property is required. “Borrowers availing personal loans after their first loan is increasing and delinquencies across asset classes are also inching up though not significant enough to ring alarm bells,” he points out.

 

Experts point out that the quality and end-use of personal loans will be closely monitored in the coming months given that the banking industry has lately seen a surge in demand for small-ticket personal loans. Singhal says that while much stress isn’t seen in the 90 days past due (DPD) bulge, repayments are being stretched in the 30 DPD pocket, which is a signal for delinquencies beginning to look up.

Therefore, while a debt trap may not be in the making yet, prolonged slowdown and job losses could turn the situation otherwise. There is also immense push by the government on banks to lend more to consumers and small businesses. Whether these force banks to fall into a trap, needs to be seen.