Personal loans are driving the credit market in India
Retail lending, granted to individuals by a bank or other financial institution, continues to drive credit growth in India, while corporate lending performance remains subdued, according to the latest Reserve Bank of India (RBI) data for fiscal 2021.
Interestingly, most of the demand came from the smaller ticket segments. According to RBI data, retail loans are the main source of loan growth for the lending market, posting 14 percent annual growth, while corporate loans declined 4 percent year-on-year.
According to the RBI report, near-term growth prospects are unlikely to recover sharply as recovery in corporate lending (loans or term loans) is still not visible in the market. That being said, this balanced growth has been seen across all regions, but metropolitan areas are still not ready to capture most of the growth in rural and semi-urban areas. The report finds that there is greater focus on reducing ticket sizes while residential construction continues to show impressive growth across all retail asset classes with a healthy mix of volume and value growth. The RBI report also notes that credit growth is being driven by the retail or SME side rather than the corporate sector. Strong growth in ticket sizes up to Rs 40 million is expected. On the other hand, a major slowdown is possible for loans with ticket sizes greater than Rs 100 million.
Credit growth has slowed but is becoming more granular, according to a recent report by Kotak Institutional Equities. At the same time, credit growth has been fairly weak during Covid, ending fiscal 2021 at 5 percent yoy. The share of bank lending to industry has also declined steadily and significantly (from 42 percent in FY2014 to 28 percent in FY2021) as the banking system went through the corporate NPL cycle. Increased liquidity in bond markets has also led to a reduced preference for corporate bank loans in recent years.
The Kotak report finds that the decline in corporate lending is consistent across public and private banks and was largely offset by an increase in retail lending. The report, which cites research from the RBI study, notes that credit growth is weakest in metro markets. The Kotak report found that the slowdown in growth was visible across all banks. Public banks have reported weak lending growth for nearly five years as they correct their balance sheets, which have been impacted by the corporate NPL cycle (which caused many banks to fall under the PCA framework, followed by a public bank merger), private banks corrected Banks have also seen a similar trend but mostly post Covid. The deceleration in private banks is skewed as major private banks like HDFC Bank and ICICI Bank report solid growth and several banks like Yes Bank, RBL Bank and IndusInd Bank report subdued or negligible loan growth.
Kotak Institutional Equities experts expect retail lending to show a CAGR of 15 percent in fiscal 2022-25. Experts point out that recent growth trends in retail bank loans have slowed somewhat due to the Covid pandemic. However, growth now seems to be recovering. Kotak experts also expect home loans, credit cards and other personal loans to lead the growth in personal loans. It has also been observed that home loans remain the largest segment and private banks have recently become more active in this area. At the same time, credit cards or unsecured loans are expected to see the fastest growth at 25 percent CAGR in the retail portfolio, but their contribution to the overall retail portfolio is relatively small at 5-6 percent. Kotak experts are bullish on this space, considering it’s likely to be a far more profitable portfolio than other products. Interestingly, the Kotak report also points out that demand for medium- to long-term loans has increased significantly and that the preference for medium- to long-term loans compared to short-term loans has changed over the past decade.