Retail and MSME loans together account for 45–60 per cent of the total loan portfolio for banks.
The Reserve Bank of India’s Financial Stability Report (FSR), published on Monday, reiterated higher-than-anticipated stress formation. But here’s the tricky part. While the report is cautious across categories of lending – wholesale, micro, small and medium enterprises (MSMEs) and consumer credit and the outlook for wholesale or corporate loans is a tad better than expected, stress could be building up in the retail or consumer lending space and MSME segment as indicated in the table. Retail and MSME loans together account for 45–60 per cent of the total loan portfolio for banks. The FSR acknowledges that with the regulatory reliefs granted following the pandemic, the real vulnerability of portfolios may not be reflected. The expectation is that starting December quarter (Q3), the stress is likely to be projected in the financials. Suresh Ganapathy of Macquarie Capital anticipates retail stress to touch a 10-year high of four per cent. Added to this, the larger problem could be that of pricing these loans.
In the 2016–2019 credit cycle, competition was just about building in these segments. This allowed banks to be on the drivers’ seat in determining the interest rates. Pricing the asset quality risk based on credit bureau scores and ensuring growth was much less a challenge. Interest rates, too, were just about at the start of downward movement, unlike today’s scenario where they have bottomed out.
While there could be 12 – 18 months of pause on the base rate trajectory, with interest rates at the lowest, how adequately risks have priced in remains to be seen. The problem will be less for those continuing to grow their unsecured loans, explains Abhinesh Vijayraj of Spark Capital. “Being short-tenure, they are not vulnerable to interest rate risk,” he explains, adding that even vehicle loans with 3 – 5 years tenure would remain safe. The problem will be for those who have turned cautious on personal loans, and have shifted focus to home loans and loan against property. “If loans were lent based on the assumption that housing prices cannot fall from hereon, then banks may not have factored in the collateral call adequately,” he adds. Banks such as IndusInd Bank, Federal Bank, DCB Bank
and Axis Bank
which have renewed their focus on secured loans may be, hence, walking on a tightrope.
With excess liquidity in the books, drawing a balance between growth and profitability in the retail and SME segments will be tested this year.