India's retail credit market is now the most dynamic in the emerging markets outside China. In the last three years, credit to households in India has grown at a compounded annual growth rate (CAGR) of 15.7 per cent in dollar terms against the 11.9 per cent average growth in emerging during the period.
China tops the growth chart with annualised growth of 18.5 per cent per annum during the period. Total retail lending in India reached $281 billion at the end of December 2017, up from $181 billion at the end of December, 2014, data by Bank for International Settlement (BIS) has revealed.
China accounts for nearly half of all retail credit in the emerging markets with loan outstanding worth $6,142 billion at the end of December last year (see chart).
In the same period, credit to households in emerging market, except China, grew at a CAGR of 5.5 per cent growing. Indian retail credit market is now fourth largest in the emerging world, behind China, Brazil and Thailand, but ahead of Russia, Malaysia, Indonesia and Mexico. Analysts attribute the growth of specialized retail lenders in India, especially in non-banking space and a sharp decline in interest rates between 2014 and 2016.
"There has been a virtual explosion of retail NBFCs in the last three years that has greatly expanded the market for retail lending in the country. The process was aided by a dip in interest rates beginning early 2014, which made loans affordable," says C Chokkalingam, founder & MD Equinomics Research & Advisory Services. The yield on 10-year government bond, which is a benchmark for interest rates, declined by nearly 300 basis points between April 2014 and December 2016. Low interest rate regime allowed lenders and retailers expand the market for loan-backed consumer purchases through zero-interest rate schemes.
Growth in India has also been aided by low base and country’s large population, which translates into many more customers for mass consumer items such as two-wheelers, mobile phones and consumer durables. “Unlike other emerging markets in Asia and Latin America, retail loan started from a very base translating into faster growth rate. This will continue unless penetration rises to the levels seen in other countries,” adds Chokkalingam.
According to BIS data, total retail credit in India was equivalent to 10.9 per cent of the country's gross domestic product (GDP) at the end of December 2017 quarter, the lowest in the emerging market. The corresponding ratio was 48.4 per cent in China, 17 per cent in Indonesia and around 16 per cent in Mexico and Russia each. Experts said that push-factor is also at play with lenders pushing retail loans as industrial credit has failed to take off.
“As banks are finding it tough to push industrial credit, the industry’s entire focus has shifted to retail lending where it’s easier to find new customers. Their effort has been eased by fewer delinquencies in retail side, unlike mounting bad assets in their corporate loan book,” says Devendra Pant, chief economist and head public finance India Ratings.
According to him, loan-to-income ratios are still benign in India but at current pace of growth it could reach the danger zone in a few years. “Retail loans are growing at a time when household savings (as per cent of GDP) has been steadily declining. The 16 per cent of GDP still exceeds loans, but if savings continue to shrink, it will increase the risk for lenders and borrowers in the longer term,” he adds.