Banks are choosy about retail loans
With the slowdown in corporate credit drawdown, retail lending was the product of choice for banks just before and during the pandemic. As the pandemic wreaked havoc on jobs and incomes, there were also concerns about a brewing bubble in the consumer credit sector.
But data from RBI’s latest Financial Stability Report (FSR) shows that, while delinquencies have not soared, banks are starting to become more selective with retail lending – reducing approval rates and focusing more on the main borrowers.
Selective on borrowers
FSR data from credit bureaus shows that while there is strong retail appetite for borrowing, bankers are approving fewer loans from retail applicants compared to a year ago. Private banks tightened approval rates at a faster pace, with the rate falling from 32.6% in the first quarter of June FY21 to 29.1% in the first quarter of FY22. OSP, approval ratings fell from 37.7% to 36%, a moderation of 170 basis points.
Banks have also tipped their retail lending balances in favor of prime, prime plus and super prime customers with high credit ratings, while pulling out of subprime customers. The share of preferred and senior customers, as a proportion of total active credit customers for banks, increased from 48.4% in March 2021 to 50.7% in March 2022. Private banks and non-bank financial companies ( NBFC), in particular, appear to have tightened their lending practices, while PSBs have not yet become very strict on borrower credit ratings (see table).
Bankers say the tightening could be due to banks’ concerns about the impact of rate hikes on retail borrowers and its impact on delinquencies. With the RBI pushing for external lending linked to benchmarks, the transmission of rate hikes to borrowers is now faster. An FSR survey shows that in March 2022, 43.6% of all bank loans were linked to external benchmarks, compared to only 9.3% in March 2020. Private banks are more exposed to these loans at variable rates, with more than 60% of their loans. portfolios of loans linked to variable rates.
“In anticipation (of rate hikes), private banks have eased off retail lending since December 2021, as repricing them would be a challenge compared to corporate lending,” observes one banker. This trend should continue until repo rates normalize. In fact, private banks’ decline in the retail sector is reflected in their lending growth, which halved from over 30% in FY19 to 15% in FY19. ‘EX22. However, PSBs that only joined the retail group since fiscal 2018 continue to grow in the retail segment. Their personal lending growth increased from 10% in FY2019 to 12.6% in FY22. Gradual credit growth for PSOs and private banks from corporate lending has caught up with consumer loans.
The FSR indicates a large improvement in the overall asset quality of the banking system, with aggregate gross NPAs falling from over 9% in FY19 to 5.9% in FY22. wholesale lending (loans above Rs 5 crore) saw the biggest decline, with gross NPAs falling from 14% in FY19 to 7.7% in FY22. experienced some moderation in the NPAs, but not at the same pace.
At 4.1% gross NPAs in March 2022, personal loan NPAs remain around 110 basis points above pre-pandemic levels in March 2019. While corporate loans have not seen much restructuring during the pandemic, 2.4% of retail and MSME loans respectively underwent restructuring in line with RBI’s Covid guidelines. While the private banks are doing better with only 1.4% of their restructured advances, the OSPs have been more liberal in welcoming their borrowers, their portfolio restructured at 3.4%.
According to these trends, PSOs have more reason to be cautious with retail lending, as they have a higher proportion of borrowers with low credit scores and also seem to sit on a higher share. of the restructured portfolio. But that said, given that much of their earnings growth has been driven by lower provisioning costs of late, issues in the retail lending industry could disrupt the positive earnings trajectory of all banks.
July 09, 2022