Will Personal Loans Add to NPA Woes?

Mon, 13 Feb Pre-Open

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One surprising aftermath of the November 8 notebandi was that people borrowed more money to spend on high-value items and travel, making consumer-lending its unexpected beneficiary. And here we were thinking that only basic needs and staples make up the typical shopping list during periods of economic stress.

Data recently released by the Central Bank of India showed that demand for white goods such as refrigerators and automatic washing machines drove credit expansion in India. Consumer-durables loans at banks increased 18.2%, and personal loans 15.2% in the month, while total non-food credit rose 4.8%.

Meanwhile, NBFC companies like Bajaj Finance also relied on retail credit during the period. The company reported a 47% jump in consumer durable loans during the third quarter of FY17.

Infrastructure loans, that so far were the biggest growth drivers, today account for a large proportion of the non-performing assets (NPA) on the books of the bigger banks. So banks have been seeking out new avenues of lending. With industry not performing too well, and agriculture languishing, retail lending emerges as the preferred choice.

Also, with lakhs of people depositing cash in banks post demonetization, the Reserve Bank of India's interest cuts are finally being passed on to customers.

In fact, banks and lenders began the year by announcing large-scale rate cuts. As a result, personal loans stood at a six-year low. This means you can get more from your loan in this low-interest rate environment - as this can help your monthly loan EMIs come down.

However, this could turn out to be a pain for the banking industry. According to an article in Livemint, housing loans, a sub-component of this category, grew at 18.8% in 2015-16, against the previous year's 16.7%. However, repayments and defaults also depend upon the health of household incomes. A rising rate of default usually shows that incomes are stretched relative to the quantum of repayments required. Apart from pre-loan screening and monitoring issues on the part of banks, there is also a concern that disposable income growth has possibly not matched up to expectations at the time of lending.

There are three other areas that account for a reasonable share of personal loans outstanding: automobiles, education and credit card. Of these, while the automobile loan segment is not a high default area, education is definitely proving to be so. Government policy mandates provision of education loans of up to Rs 4.5 lakh without collateral.

So recovery too is difficult. Also the inability to find jobs after financing education with loans is resulting in rising defaults, which, reportedly averages 8% of such loans.

It is more than likely that India would witness another retail lending boom, led by banks trying to maximize their presence. The fast-paced growth in retail loans could raise discomfort. As such, the strain of another round of fresh NPAs may be too much for banks to bear, particularly public sector.

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