Data on credit by Scheduled Commercial Banks (SCBs) to various sectors indicates that the share of retail sector loans is now more than the share of loans to industry. This has seen a significant shift in the last 10-odd years.
In recent years, particularly after the COVID-19 pandemic, retail bank credit significantly contributed to the recovery of aggregate bank credit growth. The contribution of retail loans to overall credit growth began to rise and has become the largest of all industries. The overall growth in non-food credit was driven by the expansion of credit to non-industrial sectors, particularly lending to the housing and credit card segments.
The recent data on the banks’ retail lending portfolios indicate that the banks are paying closer attention to the retail credit market. In light of this, we look at the trends in overall credit growth, retail lending, and its contribution to the recovery of credit growth.
Note: The non-food credit data is divided into categories including agricultural and related activities, industries, services, and personal loans, according to the sector-wise and industry-wise bank credit (SIBC) compiled by the RBI. Retail credit mentioned in the article refers to the personal loan category.
Consistent growth in the overall credit in the last decade
There had been many hindrances in the last decade that impacted the growth of credit: non-performing assets (NPA), demonetization, Goods and Services Tax (GST), COVID-19 pandemic being major among them. Yet, the credit growth ecosystem has grown at an impressive pace, primarily owing to the technological adoption by lenders and the expanding aspirations of the Indian middle class.
The overall amount outstanding has seen consistent growth in the last decade. It grew at a Compounded Annual Growth Rate (CAGR) of 33% from Rs. 33.45 lakh crores in 2010 to Rs. 142 lakh crores in 2023. The number of accounts also rose from 11.9 crore to 36 crore during the same period, at a CAGR of 23%. The average ticket size of the amount outstanding increased from Rs. 2.81 lakhs to Rs. 3.94 lakhs during this period.
Retail sector credit leads the growth in overall credit.
To understand the dynamics behind the growth of overall credit, occupation-wise credit growth is analysed. It is observed that there is a gradual expansion of credit to the ‘retail-sector’ replacing the traditionally credit-seeking industrial sector. A ‘retail-shift’ in the credit disbursal can be seen during the last decade. The increase in non-food credit was primarily driven in the latter half of the previous decade by the development of credit to non-industrial sectors, particularly lending to the housing and credit card segments.
The share of credit to the industrial sector out of the total credit declined from 40.5% in 2010 to 25% in 2020, whereas the share of credit to the retail sector (personal loan category) grew from 16.7% to 28.2% during the same period. Some of the most cited reasons behind such a shift from the industrial to the non-industrial sector are the rise in economic prosperity and purchasing power, coupled with technological advancements related to the rising usage of credit/debit cards, ATMs, and direct debits among others. Further, the banks might have exercised caution in credit to the industrial sector, particularly after the prolonged cycle of non-performing assets during the first half of the decade.
Housing segment dominates the retail sector, followed by vehicle loans.
The contribution of key sectors within the retail sector indicates that the housing segment contributes to nearly half of the total credit in the retail sector. However, its share out of the total has been declining marginally since 2015. The housing segment was contributing to around 54.8% of the total retail credit in 2010, which rose to a decadal high of 55.93% in 2015. It started declining thereafter, finally settling at 49.28% in 2023. This is the first time in the last decade that its share has gone below 50%.
The housing segment is followed by vehicle loans with a contribution of around ten percent. The average share of vehicle loans from 2010 to 2016 stood at 9.5%, while from 2016 to 2023, the average share rose to 11.1%. A similar trend can be seen in personal credit cards, whose average share during the same corresponding period grew from 3.23% to 4.62%. The changing aspirations of the younger cohort with the increased access to new financial products, coupled with affordability could be one of the possible reasons behind such growth.
On the other hand, the share of credit for education out of the total credit is declining. This could be due to a shift in the approach of banks as they slowly withdraw lending to poorer students who might have trouble finding employment. While banks may be compelled to provide educational loans under the priority sector lending, the pace of lending is not the same. Some studies also point out to the high level of defaults in educational loans than other key segments in the retail sector as a possible reason for a declining share of educational loans out of total credit.
Credit concentration in retail sector- A source of systematic risk in future?
The banking industry has undergone significant change as a result of the technological revolution. Banks have redesigned their business structures to target the younger segment of the population by remodelling the existing products and creating new and uniquely designed financial products. As a result, there is an uptick in the credit to the retail sector. However, the retail sector is not a risk-free sector. Higher retail loans often result in loan stacking and deferred payments. Understanding whether the uptick in credit growth is structural or cyclical is crucial in evaluating appropriate measures to ensure the healthy asset quality and maintenance of the risk-reward ratio.
As per an article in the RBI Bulletin, June 2023, the ongoing ‘retail-shift’ is not permanent, but rather cyclical in nature and the credit growth may not continue to be high. Yet, with high uncertainties in global socio-economic and political scenarios, banks must be vigilant and assess the trends in retail credit growth on a constant basis to mitigate the risks of higher retail loans.
Featured Image: RBI Bulletin, June 2023
