Indian commercial banks’ retail lending has risen faster than loans to large businesses since the COVID-19 pandemic, S&P Global Market Intelligence data showed, underscoring the central bank’s concerns about unsecured loans.
Retail loans was the fastest-growing segment among the three biggest private sector lenders, and among their state-owned peers, since at least the fiscal year ended March 2021, the data showed.
For State Bank of India, the country’s biggest lender by assets, retail loans grew 42.7% to Rs 12.43 lakh crore by September 30, 2023, from Rs 8.71 lakh crore as of March 31, 2021. Credit to corporates was up 19.4% over the same period. The bank’s public sector and private sector peers — such as Bank of Baroda Ltd, where retail loans increased 61% in the same period, and Axis Bank Ltd, where retail loans rose 57% — showed a similar trend.
The proportion of retail loans as a percentage of domestic loans has increased only slightly at the six banks in the S&P Global Market Intelligence sample, the data showed. HDFC Bank Ltd was an exception among the major banks as its retail loans jumped in the wake of its merger with parent Housing Development Finance Corp Ltd, a home finance company.
Strong economic growth in India has prompted high demand for credit in the country. Unsecured loan growth grew as demand for credit increased in the post-COVID era, and banks’ lending moved toward the retail loans segment. Bank credit rose 15% in the financial year ended March, 31, 2023, led by personal loans, which registered a growth of 20.6%, RBI data showed. Loans to the industry, however, grew only 5.7% in this period.
“We expect Indian banks loan growth to stay somewhat in line with the trajectory of nominal GDP, and loan growth to the retail sector to continue to exceed that of the corporate sector,” said Deepali Seth Chhabria, an analyst at S&P Global Ratings. “Corporate borrowing is also picking up momentum, but the uncertain environment may delay capital expenditure-related growth.”
RBI raises concerns
The Reserve Bank of India (RBI) raised concerns over unsecured advances, a risky segment of retail loans, as the proportion of such advances increased to 35% in 2023 from 25% in 2007, according to a Jan. 18 research paper from RBI employees. Housing loans, which make about half of retail loans, have stayed relatively stable in that period, the central bank employees said.
“Both the secured and unsecured components [of retail loans] have registered growth rates higher than overall bank credit growth,” the paper said, noting that the “surge in retail credit” has continued even after the central bank withdrew the temporary measures introduced to help households during the pandemic.
The fast growth of unsecured loans prompted the central bank in November 2023 to increase risk weights on unsecured personal loans, credit cards, and lending to nonbank financial companies by 25 percentage points. Risk weights refer to the capital banks keep aside as provisioning to cover any loan defaults.
“We believe retail growth should moderate hereon, given the RBI’s recent action on unsecured loans, which has been the key growth driver and, thus, should lead to some moderation in overall credit growth as well,” brokerage Emkay Global wrote in a Jan. 10 report.
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