With corporate borrowing slowing, personal loans were the product of choice for banks just before and during the pandemic. As the pandemic ravaged jobs and incomes, there were also concerns about a consumer credit bubble.
But data from RBI’s latest Financial Stability Report (FSR) shows that while defaults have not skyrocketed, banks are beginning to be more selective about personal loans — lowering approval rates and focusing more on prime borrowers.
Borrower selective
Data in the FSR, sourced from credit bureaus, shows that while retailers have a strong appetite for credit, bankers are approving fewer loans from consumers than they were a year ago. Private banks tightened approval rates faster, with the rate falling from 32.6 percent in the June quarter (Q1) of FY21 to 29.1 percent in Q1 FY22. Among public broadcasters, approval ratings have fallen from 37.7 percent to 36 percent, down 170 basis points.
Banks have also tilted their personal lending mix in favor of prime, prime plus and super prime customers with high credit ratings, while retreating from subprime customers. The proportion of prime and higher customers in the banks’ total credit-active customers increased from 48.4 percent in March 2021 to 50.7 percent in March 2022. In particular private banks and Non-Bank Financial Companies (NBFCs). , seem to have tightened their lending practices, while public banks have not yet been very strict about borrowers’ credit ratings (see table).
Bankers say this tightening could be due to banks’ concerns about the impact of rate hikes on retail customers and their impact on defaults. With the RBI pushing for external benchmark-linked lending, rate hikes are now being passed through to borrowers more quickly. A survey in the FSR shows that as of March 2022, 43.6 percent of total bank lending was indexed to external benchmarks, compared with just 9.3 percent in March 2020. Private banks are more exposed to such variable-rate lending, with over 60 percent of loan books indexed to variable interest rates are tied.
“Prior to[rate hikes]private banks have slowed down on retail loans since December 2021 as a re-rating would present a challenge versus corporate loans,” noted one banker. This trend is expected to continue until repo rates normalize. Indeed, the retreat of retail private banks is reflected in their loan growth, which has halved from over 30 percent in FY19 to 15 percent in FY22. However, PSBs, which have only joined the retail party since FY18, are still strong in the retail segment. Their retail loan growth has increased from 10 percent in FY19 to 12.6 percent in FY22. Incremental credit growth for both public sector entities and private banks from corporate credit has caught up with consumer credit.
Increased NPAs
The FSR points to a large improvement in the banking system’s overall wealth quality, with aggregate gross NPAs falling from over 9 percent in FY19 to 5.9 percent in FY22. Wholesale credit stress (loans over Rs 5 crore) has seen the sharpest fall, with gross NPAs falling from 14 per cent in FY19 to 7.7 per cent in FY22. Retail lending has seen some moderation in the NPAs, but not at the same pace.
At 4.1 percent gross NPAs in March 2022, NPAs for retail loans remain about 110 basis points above pre-pandemic levels in March 2019. While corporate loans have not undergone much restructuring during the pandemic, 2.4 percent each of retail and corporate loans have MSME loans restructured in line with RBI’s Covid guidelines. While private banks fare better with just 1.4 percent of their restructured loans, public financial institutions are more liberal in adjusting to their borrowers, with their restructured book at 3.4 percent.
Based on these trends, public banks have more reason to be more cautious about lending to consumers as they have a higher proportion of borrowers with poor credit ratings and also appear to be sitting on a higher proportion of the restructured inventory. Given that much of their recent earnings growth has been driven by lower provisioning costs, problems in the consumer credit space could derail any bank’s positive earnings trend.
Published on
July 09, 2022
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