Retail loans drive India’s loan market

Retail loans, which are extended to individuals by a bank or any financial institution, continue to drive loan growth in India, while the performance of corporate loans remains subdued, according to the latest data for FY 2021 from the Reserve Bank of India (RBI).

Interestingly, most of the demand came from the smaller ticket segments. According to RBI data, personal loans are the main source of loan growth for the lending market and amounted to 14% year-on-year growth, while corporate loans were down 4% year-on-year. annual.

According to the RBI report, the near-term growth outlook is unlikely to pick up sharply as a rebound in corporate credit (credit or term loans) is still not visible in the market. Moreover, this balanced growth has been observed in all geographies, but metropolitan areas are still not ready to take advantage of it, with most of the growth occurring in rural and semi-urban areas. The report observes that there is a greater focus on reducing ticket sizes and that, at the same time, housing continues to show impressive growth among all retail asset classes with a healthy mix. between growth in volume and in value. The RBI report further highlights that loan growth is driven by retail or SMEs rather than the corporate sector. Strong growth in ticket sizes of up to Rs 40 million is expected. On the other hand, a significant downturn in lending with note sizes over Rs 100 million is possible.

According to a recent report from Kotak Institutional Equities, loan growth has slowed but is becoming granular. At the same time, loan growth during Covid was quite weak, ending fiscal 2021 at 5% year-over-year. The share of bank credit to industry also declined steadily and significantly (from 42% in FY2014 to 28% in FY2021) as the banking system went through the NPL cycle (non-performing loans) of companies. Increased liquidity in bond markets has also led to a decline in corporate preference for bank credit over the past two years.

The Kotak report observes that the decline in business credit is uniform for public and private banks and has been largely offset by an increase in personal credit. The report citing studies from the RBI study observes that loan growth in metropolitan markets is the weakest. The Kotak report observed that the slowdown in growth was visible for all banks. State-owned banks have been reporting weak loan growth for nearly five years as they have corrected their balance sheets which have been affected by the corporate NPL cycle (leading many banks to enter the lending framework). ‘APC, which was later followed by the merger of public banks), private banks also saw a similar trend, but mainly after Covid. The slowdown in private banks is skewed with large private banks like HDFC Bank and ICICI bank registering solid growth and several banks like Yes Bank, RBL Bank, IndusInd Bank registering moderate or negligible loan growth.

Experts at Kotak Institutional Equities forecast retail lending to post a CAGR of 15% in fiscal year 2022-25. Experts point out that recent retail bank credit growth trends have been somewhat depressed due to the Covid pandemic. However, growth appears to be picking up now. Kotak experts also expect home loans, credit cards and other personal loans to lead retail bank credit growth. It has also been observed that home loans continue to be the largest segment and that private banks have recently become more active in this space. At the same time, credit cards or unsecured loans are expected to experience the fastest growth at 25% CAGR in the retail portfolio, but their contribution to the overall retail portfolio is relatively small at 5-6%. Kotak experts are optimistic about this space, considering that it should be a much more profitable wallet than other products. Interestingly, the Kotak report also highlights that there is a marked increase in demand for medium and long term loans and there is a shift in preference for medium and long term loans versus short term loans. term in the previous decade.

Priscilla C. Carnegie