Covid-19 impact: Consumer lending may be most disrupted by lockdown

Categorised as unsecured loans, these will feel the brunt of weak demand and income disruption of borrowers

A critical takeaway from RBL Bank’s media statement on its business updates pertains to its credit card business. “Acquisitions have stopped post the lock down, only digitally sourced cards being booked,” said the private bank. Further, credit card spends are down 40 per cent during the lockdown period and the bank expects a slight increase in credit cost in March. In a call hosted by UBS, HDFC Bank also stated that card swipes reduced in March. All these point at some stress brewing in consumer business (credit cards and personal loans, which are mainly unsecured) of banks and lenders. But how exacting can it be?

Analysts at UBS expect retail loan growth and collections to be affected due to social distancing and lower discretionary spend.

“Banks exposed to the above would 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 a bit late to join the party. 

Growing 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.

Expanding income levels of consumers and their aspirational need was the premise for lenders to grow in this business. Also, as lenders were targeting their existing customers, it didn’t matter if these were unsecured loans. But, times have changed overnight and banks are tightening their purses. 

With some sectors such as airlines and food delivery already faced with job losses and salary cuts, the segment suddenly appears more vulnerable compared to others. 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 post lockdown there will be a pent up demand for discretionary spends and hence the demand disruption could only be temporary, significant salary growth in the next one – two years seems unlikely,” said an analyst from a domestic brokerage. Therefore, even if demand comes back, the layer of excessive spending seen prior to the slowdown may not come back. “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 practice of relying on loans to move up the lifestyle may take a backseat in the medium term. Bajaj Finance would soon publish its loan growth numbers for March quarter (Q4), which would give the Street some direction on what it can expect for other lenders. While a part of the pain may be captured in Q4 results of private lenders, analysts say June and September quarter results will be critical for them to be reassured of the asset quality of these lenders.