Other side of financialisation: Unsecured loans flowing into stock market?

There's been a dramatic rise in loans against gold in the past one year, but growth in unsecured loans is slowing. Bank loans to the NBFC sector have also dipped

Going beyond moral suasion, the RBI had, last November, jacked up the risk weightage for unsecured loans from 100 per cent to 125 per cent. This raised the capital requirement for such loans and made them costlier for borrowers

  Nine out of 10 individual traders lost money in the futures and options (F&O) segment of the stock market in three years between 2021-2022 (FY22) and FY24, a study by the Securities and Exchange Board of India (Sebi) points out. An estimated 11.3 million retail investors collectively lost Rs 1.81 trillion during the three years (an average of Rs 2 lakh per trader); FY24 alone accounts for Rs 75,000 crore in net losses.

 

The latest study follows the capital market regulator’s January 2023 report, which had found that 89 per cent of individual F&O traders lost money in FY22.

 

Despite consecutive years of losses, more than three-fourths of the traders who suffered losses continue their F&O activity. In fact, the number of retail traders dabbling in F&O has increased from 5.1 million in FY22 to 9.6 million in FY24. No wonder then that the average daily turnover on stock exchanges has surged to a record high at Rs 540 trillion in September compared with close to Rs 360 trillion a year ago.

 

In FY24, nearly 7.3 million individual traders lost money, with an average net loss of Rs 1.2 lakh per person, inclusive of transaction costs.

 

Only 7.2 per cent of individual F&O traders made a profit over the three-year period. About 1 per cent of individual traders managed to earn profits of Rs 1 lakh or more, after adjusting the transaction costs, while 3.5 per cent of those who lost (around 400,000 traders) incurred an average loss of Rs 28 lakh over the last three financial years.

 

Where do these traders come from? What's their socioeconomic background? Well, over 75 per cent of individual traders had declared an annual income of less than Rs 5 lakh.

 

“A rise in individual traders’ participation in the F&O segment has … kick-started a debate on product suitability and the need for safety nets and firewalls for individual investors,” the latest Sebi study points out.

 

There is also a debate on where the money is coming from. At the recent Business Standard BFSI Summit, former banker KV Kamath said the financialisation of savings has been propelled by technology, but that’s only one side of it. “We should also reckon what the Reserve Bank of India (RBI) governor, in particular, has been talking about — the risks in terms of operating in markets in a way that you ought not to… Laypeople are getting into the F&O segment.”

 

Kamath went on to say, “People who have lost money in the F&O segment have come from the unsecured loan market. That is why I think the RBI is right to caution on unsecured lending and end use of money that is borrowed from providers of funding… So, financialisation is good. But I think rash activities are not good… That is why the red flag is being raised by both regulators.”

 

At the same summit, when asked whether part of the bank credit was flowing into the stock market, RBI Governor Shaktikanta Das said there’s “no hard data” on that; there's only anecdotal evidence. The RBI has conducted a “quick sample survey and got a broad sense of what’s happening,” he said but did not share the outcome of the survey. “It’s very difficult to quantify (how much money is flowing into markets) but we have got a broad sense,” he said.

 

The RBI has tightened the norms for IPO financing and loan against shares. For the banking sector as a whole, Das doesn’t see a major risk – something that can cause systemic instability – at the moment, but he asked the banks to monitor the end use of unsecured loans.

 

Let’s look at the flow of bank credit over the last couple of years.

 

As on September 20, total bank credit stood at Rs 171.25 trillion, up 13 per cent over the past one year. In the previous year, between September 23, 2022 and September 22, 2023, the growth was 20 per cent.

 

In the past one year, the growth in credit given to agriculture and allied activities has been 16.4 per cent, industry (micro, small, medium and large) 8.9 per cent, services 13.7 per cent, and personal loans 13.4 per cent. The comparable figures for the previous year were 16.7 per cent, 6.5 per cent, 25.4 per cent and 30 per cent, respectively. While loans to the industry have gone up, they remain almost flat for agriculture, while there has been a sharp drop in personal loans and loans to services.

 

Now, let’s turn our attention to some of the sub-sectors. The growth within personal loans for buying consumer durables is 8.6 per cent, down from 9.8 per cent; against fixed deposits, it’s 9.4 per cent, down from 18.7 per cent; and for other personal loans, it is 11.4 per cent, sharply down from 26.3 per cent. However, loans against loans and shares have jumped to 22.9 per cent from 5 per cent, and loans against gold jewellery are up 51 per cent from 14.6 per cent.

 

All these figures speak about the flow of bank money into different sectors. Non-banking finance companies (NBFCs), too, lend to these sectors. They have been in the unsecured space in a big way, but these figures don't include their exposure. There are 9,325 NBFCs and 94 housing finance companies, classified into three layers – upper layer, middle layer and base layer. Nine NBFCs in the upper layer have total assets of Rs 14.25 trillion, forming a little less than one-fourth of the assets of the sector. Banks are one of the sources of the money they lend.

 

The growth in their borrowing from the banking sector has dipped from 21.9 per cent to 9.5 per cent during this period

 

What do these figures tell us? The RBI has sensitised the banking industry about the perils of unsecured loans. There’s a dramatic increase in loans against gold, but when it comes to other segments of personal loans, particularly unsecured loans, growth has dropped in the past one year. The growth in bank loans to the NBFC sector has also dropped sharply.

 

Going beyond moral suasion, the RBI had, last November, jacked up the risk weightage for unsecured loans from 100 per cent to 125 per cent. This raised the capital requirement for such loans and made them costlier for borrowers. The risk weightage for bank loans to higher-rated NBFCs, too, was increased by 25 percentage points.

 

The capital requirement was raised for consumer credit – outstanding as well as new – including personal loans but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.

 

The growth in housing as well as vehicle loans is down. But that’s a different story.   

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking. 

To read his previous columns, please log on to www.bankerstrust.in

X: @TamalBandyo