MUMBAI : A remarkable shift has unfolded in the world of banking over the past decade in India, and it’s not what you might expect. This time, it’s not the mega loans to corporate giants that are making bankers nervous. The latest cause for concern is much smaller in scale: Consumer loans, each less than ₹50,000. These loans have reshaped the risk landscape, leaving lenders and investors on the edge.
Although corporate non-performing assets (NPAs) have shrunk over the years as chunky bad loans have been resolved, the attention of both lenders and investors has shifted to concerns surrounding small-ticket loans.
After burning their fingers over corporate toxic assets, banks transitioned to retail loans over the years and, more recently, unsecured personal loans. However, as they see emerging stress in smaller loans, a clutch of large banks and non-banks has decided to exercise caution when lending to this category of borrowers.
To be sure, this bucket of small-ticket personal loans comprises 2% of all personal loans, according to TransUnion Cibil. Total personal loans or “other personal loans” as classified by the Reserve Bank of India (RBI) stood at ₹12.2 trillion as of August, up 26% from a year ago. These unsecured loans include credit for domestic consumption, medical expenses, travel, marriage and other social ceremonies and loans to repay debt, among other things.
“As far as our portfolio is concerned, we have a very minimal presence in the smaller ticket size segment. But we will continue to monitor this as we go along,” Anindya Banerjee, chief financial officer at ICICI Bank, told analysts on 21 October.
On the broader issue of personal loans and the recurrent caution by RBI to lenders, Banerjee said the bank is not reliant on personal loans for growth, that is at less than 10% of the loan book. “Credit cards, of course, we would want to, you know, continue to expand our franchise, but personal loans, we will continue to monitor the portfolio,” he said.
ICICI Bank’s personal loan book stood at ₹1.04 trillion as of 30 September.
Analysts said when large banks say they are not disbursing small-ticket personal loans at or below ₹50,000, there is some rationale as banks do not need to chase that kind of credit. “It could also be that such borrowers may not necessarily conform to the underwriting standards of these banks. That said, it has not deterred the banks from pursuing aggressive growth within the unsecured retail space in recent years,” said Saswata Guha, senior director of financial institutions (banks) at Fitch Ratings.
Guha said managing such a rapid pace of growth sustainably could pose challenges for the future, even though the ability of banks to capture data digitally has improved over the last decade.
Some experts believe this could hit consumption to an extent if one assumes small-value loans were used for that. However, it is difficult to know the end use of personal loans.
“To the extent that people are borrowing to finance consumption, there will definitely be a case to say it will be impacted once people stop getting these loans. However, if stopped, people will look for other avenues, some much costlier than bank credit,” said Madan Sabnavis, chief economist of Bank of Baroda.
While retail credit has led to a rise in consumption, Sabnavis said, it is also because people are keener to borrow to spend than they were a couple of decades earlier. “It is not just the supply of personal loans that has gone up. It is also the demand,” he said.
The concerns are not limited to banks. Bajaj Finance, one of India’s largest consumption financiers, has decided to be careful of those with multiple small loans in both urban and rural areas. An internal analysis of industry-level data by Bajaj pointed to strong growth in the number of personal loans disbursed between 2019-20 and 2022-23.
Rajeev Jain, managing director of Bajaj Finance, told analysts on 17 October that personal loan disbursements surged from 45 million in 2029-20 to 70 million in 2021-22 and further to 107 million in 2022-23. Steeper growth was seen in two categories: less than ₹50,000 and ₹8 lakh-plus, even as the share of regularly repaid personal loans shrunk between 2019-20 and 2022-23.
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Updated: 24 Oct 2023, 10:09 PM IST
