Banks' retail book quality needs to be monitored

The shift in banks’ focus to retail lending in the past few financial years, prompted by asset quality challenges in their corporate book, lends granularity to their loan portfolios, but they will do well to keep an eye on asset quality for incipient signs of stress.

The retail book of banks doubled to Rs 40.9 trillion in FY23 from Rs 19.4 trillion in FY18, and accounted for 30 per cent of the advances (compared with 23 per cent five years ago). Also, the 20 per cent retail loan growth in FY23 was way above the 13 per cent clocked in FY22, and the banking sector’s growth of 16 per cent with pick-up in economic activity.

Vehicle loans logged a sharp growth spurt at 23 per cent on a lower base, while other personal loans grew smartly at 25 per cent. Credit card balances grew at a similar rate of 25 per cent as well, driven by the rapid shift to digitalisation, and the demographic shift of a younger population that is more comfortable with discretionary spending. Growth in housing loans — the largest segment and one that has traditionally dominated the retail portfolios of banks — was slower, though steady, at around 15 per cent.

Indeed, the share of home loans is estimated to have dropped below 50 per cent in FY23, from 52 per cent in FY18. Given that home loans are the most competitive and, therefore, an extremely price-sensitive segment, the shift to other segments is expected to result in higher yields in the retail book. Hence, unless there is a very sharp spike in retail credit costs, this should result in better retail profitability.

That said, the reported asset-quality metrics in the retail book have remained stable even through the pandemic, because the home loans portfolio of banks typically caters to customers in the salaried segment, who have relatively better credit profiles. Some stress did show up in pockets of the credit card portfolio and unsecured personal loans, but the reported metrics have been supported by write-offs in these segments. Therefore, gross non-performing assets (GNPAs) in the retail segment are estimated to be 1.7 per cent in FY23, as against 2 per cent in FY18. GNPAs were marginally lower than the 1.8 per cent registered in FY22, partly driven by growth in advances.

All the same, the asset quality trajectory and collection efficiency bear watching.

The current environment of higher interest rates compared with the past and elevated inflation (despite some respite) will have a differential impact on customer segments, depending on their own cash-flow position and leverage levels, among other things. The increasing importance of individual credit scores should also act as a deterrent for most customers, from a “willingness to pay” perspective. That, in fact, is the key structural difference between the asset quality cycle of high bad loans seen in banks’ unsecured loans portfolio between the period 2008-10 (when credit bureaus were at a nascent stage) and now.

Another positive is the increasing use of data analytics, which enables targeted underwriting as well as collections. Also, most banks extend unsecured loans to existing customers who have already been credit-tested.

At the same time, there are other structural shifts that need to be monitored. For instance, the share of rural and semi-urban markets in unsecured personal loans went up to almost 35 per cent in FY23, from less than 30 per cent in FY18.

As the proportion of retail, especially the unsecured segment, increases, it will become imperative to track early-warning indicators. While banks’ retail book should continue to exhibit healthy growth, albeit lower over the medium term due to the higher base, share gains should come down with revival in the capex cycle and, consequently, a pick-up in corporate credit growth.  

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The writers are, respectively, senior director & chief ratings officer, and director, at CRISIL Ratings