Retail credit now bigger market for banks and NBFCs than loans to industry

Retail credit is now a bigger market for banks and non-banking finance companies (NBFCs) than loans to industry and the corporate sector, which have historically been the biggest segment for lenders.  Total retail loans (outstanding) reached Rs 31 trillion at the end of March 2018, while bank credit to industry stood at Rs 27 trillion.

Total retail lending, including that by NBFCs such as Housing Development Finance Corporation (HDFC), LIC Housing and Bajaj Finance, was up 23.8 per cent, against 1 per cent growth in bank credit to industry in the last financial year.

In the last three years, bank credit to industry has grown at a compound annual growth rate (CAGR) of 0.5 per cent, against 20.1 per cent for total retail credit during the period (See adjoining chart).

Housing is the largest component of retail credit, accounting for 51.1 per cent of banks’ outstanding retail loans in 2017-18, but its share has been falling as credit card and personal loans grow faster. For Other personal loans were up 35.3 per cent in 2017-18 and accounted for 26.6 per cent of banks’ retail loan book, up from 20 per cent in 2012-13. This category includes all loans except home and vehicle loans, credit card debt, education loans and advances against bank deposits, shares and securities.

Retail loans by commercial banks were up 17.8 per cent in 2017-18 to reach Rs 19 trillion and accounted for a quarter of all non-food credit during the year. The share of retail loans was 22.8 per cent a year ago and 18.2 per cent five years ago.

NBFCs have cornered a large chunk of the market for retail credit. The combined loan book of listed retail NBFCs was up 35 per cent at Rs 12 trillion at the end of March 2018, the fastest growth rate recorded by the industry in at least a decade. Lending by retail NBFCs has doubled in three years.

Analysts expect the current trend to continue due to a mix of macro and micro factors. “Industry’s share in India’s GDP has shrunk to historic lows, drying up demand for industrial capex. At the micro level, public sector banks, the key supplier of credit to industry, are in trouble and their lending capacity has shrunk considerably in the last two years,” says |G Chokkalingam, founder and managing director, Equinomics Research and Advisory Services.

Industrial credit has also been affected by a near stagnation in fresh capital expenditure by the corporate sector. The combined fixed assets (plant, equipment and machinery) of listed companies were up 5.3 per cent during the first half of 2017-18, down from 6.2 per cent in 2016-17 and growing at their slowest pace in at least a decade.

“Most companies have put expansion on hold due to a mix of low demand growth and poor profitability in capital-intensive sectors such as metals, power, infrastructure, construction and engineering,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

In contrast, the demand for retail loans, including home and automobile loans, continues to grow, driven by expansion in the services sector and higher revenue expenditure by the government, including the implementation of the Seventh Pay Commission, which has raised salaries across the board in the government and public sector.

Analysts, however, expect the pace of growth to slow in 2018-19, given the adverse impact of a recent spike in crude oil prices and rise in bond yields. “Retail loans may still grow faster than credit to industry, but its pace is likely to come down as the consumer wallet and government finances face the heat of higher fuel prices,” says Sinha.

The rise in bond yields may also adversely impact retail loans.

Others point to the negative wealth effect of a potential correction in the stock market, especially in mid- and small-cap stocks, where retail participation is the highest.

“When the stock market is rising, it creates a positive wealth effect and investors tend to use their increased wealth to buy a new home or a fancy car. When the market falls, the effect is negative, forcing investors to cut back on big-ticket spending,” says Chokkalingam.

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