But how exacting can the pain be?
Analysts at UBS expect retail loan growth and collections to be hit due to social distancing and lower discretionary spend. “Banks exposed to the above will be hit the worst,” the brokerage adds.
While consumer finance is the mainstay of Bajaj Finance and Capital First (now IDFC First Bank), banks were late to the party.
Increasing weakness in traditional retail lending pockets, such as home loans and vehicle loans, prompted banks to diversify into consumer loans.
Among banks, HDFC Bank leads the segment, closely followed by ICICI Bank and Axis Bank. RBL Bank, too — with its tie-up with Bajaj Finance for credit cards — was steadily capturing the segment.
Rising income levels of consumers and their aspirational needs was the premise for lenders to ramp up this business. In addition, as lenders were targeting their existing customers, it didn’t matter if these were unsecured loans.
However, times have changed and banks are tightening their purses. With some sectors like airlines and food delivery facing job losses and salary cuts, the consumer lending segment suddenly appears the most vulnerable.
Analysts at Kotak Institutional Equities note that as of March 20, 2020, unsecured retail credit and consumer loan enquiries had dropped 10-29 per cent week-on-week, indicating a sharp drop in demand.
“While one could argue that there will be pent-up demand for discretionary spends that after the lockdown and the demand disruption is temporary, significant salary growth in the next 1-2 years still seems unlikely,” said an analyst from a domestic brokerage.
Therefore, even if demand revives, the layer of excessive spending seen prior to the slowdown may not return. “We won’t find people upgrading their mobile phones every six months or taking a loan for a lavish wedding or holiday,” the analyst says.
In short, the belief, even among bankers, is that the practice of relying on loans to enhance one’s lifestyle will take a backseat.
While part of the pain may be captured in the Q4 results of private lenders, analysts say the June and September quarter results will be critical, to assess the asset quality of these lenders.