Have you noticed the increased number of calls prodding you to take a “pre-approved” credit card or a personal loan? While you may or may not always entertain such offers, data shows that more people are taking retail loans.
As per data from the Reserve Bank of India, the share of retail loans in total outstanding non-food credit of banks has reached almost 25% in March 2018. This has gradually been climbing in the past few years and was at around 18% in March 2014.
Why is this happening and does it make life any easier for you as a consumer?
Why is share of retail going up?
Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com, said banks started rebuilding their retail portfolios after 2012 as retail lending saw a very difficult phase between 2008 and 2012, immediately after the 2008 credit crisis. “Almost all the banks had slowed down their retail portfolios, took losses and cleaned their books. So when they restarted, the focus was high and so has been growth,” he said.
This happened at a time when demand for retail loans was constantly on the rise. Moreover, in subsequent years, non-performing assets (NPAs) from the corporate side of the business started putting pressure on banks’ profits. NPAs continue to be an issue that the banks are trying to address. According to data compiled by Care Ratings for 26 banks, including large banks like State Bank of India (SBI), gross NPAs have continued to rise to 10.14% in March 2018, after moderating from 9.04% in June 2017 to 8.93% in September 2017.
This is resulting in the corporate lending book shrinking for a few years now, said Asutosh Mishra, senior research analyst, banking and financials, Reliance Securities Ltd. “The banks have taken substantial write-offs due to asset quality problems and more write-offs will take place in the next six months to a year. So the base of corporate lending is coming down, and in the same period retail lending is growing in absolute terms. So that is why there is an increase in share of retail,” he said, adding that retail lending has been better performing and has given healthy returns to banks.
For instance, in case of SBI, India’s largest lender, while the overall gross NPA ratio as of March 2018 was 10.91%, the NPA in retail loans was just 1.23%. Mitul Budhbhatti, associate director at Care Ratings, said that in a corporate loan, the exposure that a bank has is much larger compared to retail loans. In retail, exposure is very small and granular and also spread across many borrowers, he said.
Banks insist that the stress on corporate loans is not the only reason for pushing retail. Ashok Kumar Garg, executive director, Bank of Baroda, said, “Given the size of our bank, it is not fair to say that we are focusing on retail just because there is stress in the corporate book. We are strategically focusing on other areas,” he said.
Another factor helping the growth of retail loans is the increased adoption of digital channels. Arvind Kapil, group head, unsecured, home and mortgage loans, HDFC Bank, said that 30% of the bank’s retail business now comes through digital channels.
Are consumers gaining from this growth in retail?
The biggest change in the past few years for consumers has been access to information regarding retail loans through digital means. “About 5 years back, most people did not have access to internet. Now everyone has, and it is very easy to find out about the options digitally,” Kukreja said.
Another meaningful change for consumers has been improved service from banks in the form of lower turnaround time on loan approvals and disbursals. “The turn around times have also significantly reduced. 30% of our business is coming from loans that are approved within seconds. That has substantially boosted our business. For an unsecured loan, the turn around time would have comfortably been 1.5-2 days about 5 years back; it has now come down to a few seconds and minutes. Even for customers not having visibility, it does not take more than an hour or two,” Kapil said.
Moreover, non-banking financial companies are also coming into retail lending space. “These increased options could possibly also mean better bargaining power for a consumer because most of these lending institutions are eying a similar set of customers,” Budhbhatti said.
Also, in an attempt to attract more retail borrowers, some banks are offering risk-based low rates to consumers with a good credit score. At least three banks—Bank of Baroda, IDBI Bank and Bank of India—have such offerings on home loans. “Adoption of risk-based pricing for customers across all segments of retail loans, except education loans, and implementation of lowest pricing for retail loans was really a game changer for us,” Garg said.
While a loan could be useful in many cases, easier availability and lower rates should not be a reason for you to take one. Beware that a default on even one small equated monthly instalment could impact your credit score and hamper future prospects of a loan when you might really need it. Also, if you do not have the repayment capacity, a loan could land you in a debt trap.