and collections to be affected due to social distancing and lower discretionary spend.
“Banks exposed to the above would 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 a bit late to join the party.
Growing 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.
Expanding income levels of consumers and their aspirational need was the premise for lenders to grow in this business. Also, as lenders were targeting their existing customers, it didn’t matter if these were unsecured loans. But, times have changed overnight and banks are tightening their purses.
With some sectors such as airlines and food delivery already faced with job losses and salary cuts, the segment suddenly appears more vulnerable compared to others. 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 post lockdown
there will be a pent up demand for discretionary spends and hence the demand disruption could only be temporary, significant salary growth in the next one – two years seems unlikely,” said an analyst from a domestic brokerage. Therefore, even if demand comes back, the layer of excessive spending seen prior to the slowdown may not come back. “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 practice of relying on loans to move up the lifestyle may take a backseat in the medium term. Bajaj Finance would soon publish its loan growth numbers for March quarter (Q4), which would give the Street some direction on what it can expect for other lenders. While a part of the pain may be captured in Q4 results of private lenders, analysts say June and September quarter results will be critical for them to be reassured of the asset quality of these lenders.