Indian banks are bracing for a new wave of defaults on loans, this time from retail customers.
With Covid 19th pandemic to bring the economy stops, defaults by borrowers, especially small businesses and individuals who fight against wage has been eroded, now imminent, analysts said.
Loans to MSMEs (micro, small, and medium enterprises)
“Retail is small and loans to MSMEs (micro, small, and medium enterprises) will see a sharp decline. Even before Covid-19, unemployment increased in India. Now, the situation has worsened. Many households will face a cash crisis, “An expert fund manager for fixed income at Mumbai-based Quantum Mutual Fund, said Quartz.
It’s not like in the past when personal loans- retail loans, credit card debt, durable consumer loans, vehicle loans, or loans to small businesses with ticket size is usually below Rs10 crore ($ 130,000) -were look like safe assets by banks when comparing to the loan company.
Covid 19th pandemic
The Covid 19th pandemic, thus, could bring an abrupt end to the industry’s reliance on retail lending, a report said Box Institutional Equities, on March 30, the Reserve Bank of Data India show that in September 2019, this segment accounted for 26% of overall credit Indian lenders of Rs95 lakh crore.
The central bank also quick to see the writing on the wall. On March 27, announced a three-month moratorium on all term loans and credit card debt to avoid default. However, after the end of the moratorium, retail loans may go bankrupt, as per bankers.
This can have a cascading effect on bank finance for their recent focus on the retail area.
Major banks depend on retail loans to expand their loan books
Since the financial year 2016, almost all major Indian banks depend on retail loans to expand their loan books. This is a segment of the fastest growing credit, clocking 18% between September 2018 and September 2019.
Most of it is unsecured credit (personal loans, consumer durable loans and credit card dues).
City Union Bank SME loans
Credit for small businesses is also significant. For example, shares of public sector lender City Union Bank SME loans in the overall loan book reached about 50% in December 2019 and remained close to the mark that during the last five years.
In late 2019, the RBI has highlighted the dangers of over-reliance on retail, “diversification strategy, while helping as a risk mitigation tool, has its own limitations: a slowdown in consumption and overall economic growth may affect the demand for, and quality, retail credit.”
Moreover, in case of unsecured loans, no collateral to seize in case of default.
“A lender will not be keen in seizing assets such as mobile phones or laptops if the borrower defaults,” said an Expert.
Adding to the woes of banks is the precarious situation of small enterprises and the default infrastructure demonetisation lender IL & FS last year. Covid-19 could be the last.
Self Employed Loans or SMEs
“Self Employed Loans or SMEs as given to the owner of the restaurant is riskier than others because they do not have a revenue stream for lockdown right now,” said an Chennai- based Expert financial advisor.
Difficult times
This pocket slowdown certainly underscores the impact of the bank as the interest charged on the higher retail lending. For example, credit card holders pay 36% annual compound interest, which is higher than the interest chargeable on corporate loans in Indian Banks.
Retail unsecured, consumer (durable), and SME Loans
“We are more concerned about the retail unsecured, consumer (durable), and SME (loans) at this point as their contribution (bank) profits are high and it will impact on the net interest margin, cost, and the cost ratio (bank) and provision, “the Expert report states.
On March 19, a week before the central government announced a nationwide lock down, research and US-based brokerage firm Bernstein lowered HDFC Bank, citing high exposure to unsecured consumer credit.
