Riskier Loans Spike As Indian Banks Chase Credit Growth

September 26, 2017.

As corporate borrowing growth remains low and competition increases in home and auto lending, large Indian banks have turned to a riskier bet: unsecured loans to individuals. Outstanding credit card debt rose over 30 percent year-on-year in July and personal loans increased by around 35 percent, according to data available with the Reserve Bank of India. That’s twice the 15 percent growth in total retail loans, and the gap has widened over the last one year. In comparison, overall bank credit grew 7 percent.

Written by Vishwanath Nair - Originally published at this link.

Credit cards and personal loans together contribute 30 percent of the total Rs 16.65 lakh crore outstanding retail loans of scheduled commercial banks. To be sure, it’s just 7 percent of the total loans. Probably why bankers are not worried.

“Stress does not appear overnight. We can see where it is building up and take appropriate measures in time,” Arvind Kapil, country head-unsecured loans and mortgages at HDFC Bank, told BloombergQuint. “Personal loans are also granular and the end use is well diversified, which gives us comfort while lending.”

In 2008-09, when Indian companies where reeling under the impact of a global financial crisis, banks saw delinquencies build up in credit card and personal loan book. That made them cautious. And Credit information company TransUnion CIBIL’s latest survey of 1,088 urban respondents found that 29 percent spent more than the budgeted amount on their credit cards over the past 12 months. Around 20 percent took longer than planned to pay back their card outstanding, according to the survey results released on Tuesday.

Personal loans carry interest rates of 11-15 percent on an average and credit cards charge around 25 percent annually, given the risks involved. Banks believe these are good reasons for them to grow at a slightly faster pace in the unsecured segment without affecting the quality of their loan book.

Lenders have rolled out products and initiatives to gain customers. HDFC Bank uses social media analytics to determine whether it can give out credit cards to first-time customers. And it’s been pushing personal loans. Its credit card portfolio rose by 37 percent year-on-year to Rs 29,101 crore at the end of June, while personal loans rose 36.5 percent to Rs 56,067 crore.

"We are growing at a healthy pace. We have risk policies which are well placed to advise the customers accurately on the amount of loan they can avail. Also, structurally credit bureaus have added immense value to the industry."-Arvind Kapil, Country Head-Unsecured Loans And Mortgages, HDFC Bank

ICICI Bank entered the payday loan market to offer short-term loans to customers at a high interest rate, according to a report in the Times of India. Credit card loans and personal loans rose 37 percent and 40 percent year-on-year, respectively, in the April-June period, its investor presentation said.

Its private sector peer Axis Bank Ltd. too aims to increase its credit card users from within its customer base and source a small portion of the personal loan book from outside.

"We are largely targeting our own customers. We have advanced assessment tools and analytics, which is helping us maintain the book quality. Customers are also better aware of the importance of maintaining a good credit score, which ensures that they repay on time."-Rajiv Anand, Executive Director, Axis Bank

Credit cards and personal loans together account for about 12 percent of the total retail credit for Axis Bank. Anand said the low concentration of unsecured loans gives banks the headroom to grow the category without worrying about over-exposure.

India’s largest lender, State Bank of India, too will be give out pre-approved credit cards to its own customers. Through its subsidiary SBI Cards, the lender has 49.75 lakh cards, according to RBI’s July data.

Vijay Jasuja, chief executive officer at SBI Cards, said the increase in credit card loans is not worrying since it’s keeping up with the increase in card spends, which are growing at around 40 percent year-on-year every month.

“Unless the pace of growth in outstanding credit card loans is much higher than spends, there is no danger of customers rolling over credit and defaulting. The delinquency rates are around 1.75-2.4 percent, which is very healthy,” Jasuja said.

"Only about 35 percent of our credit card customers are from SBI. We are improving synergies with the bank using pre-approved credit cards as a tool. Using this, we should be able to double our card base within a year."-Vijay Jasuja, Chief Executive Officer, SBI Cards

Bank of Baroda, earlier this month, announced a special lending programme with Amazon India to provide unsecured loans ranging between Rs 1 lakh and Rs 25 lakh to select small business owners. Bankers said mostly such loans are targeted salaried customers, who have secured jobs and are seeing healthy increase in wages. These factors are likely to ensure that banks do not run into a crisis anytime