A recent study by researchers from the Misra Centre of Financial Markets and Economy at Indian Institute of Management Ahmedabad (IIMA) analysed the impact of economic uncertainty on the composition of bank credit across the household and firm loans using bank-level data from 40 developed and developing countries.
The study carried over a long period of 2002-18 covering global financial crises revealed that an increase in economic uncertainty is associated with a higher share of household credit in banks’ loan portfolios as compared to corporate lending. Thus, the estimations indicate banks’ relative preference for lending to households in the face of heightened uncertainty.
“The shift towards household loans likely reflects an attempt by banks to reduce the riskiness of their overall loan portfolio during episodes of high uncertainty,” the study states.
IIMA’s Prof Sanket Mohapatra, one of the two researchers, said that forthis study, motivation was derived from the fact that overall bank lending slows down during financial crises but the target was to check what is happening within lending portfolios.
“Along with a decline in lending, a shift in portfolios was reported. Household loans are little less risky than loans to companies. So is the shift in the portfolio from corporate to household loans. Banks have preferred lending for households than to companies,” Prof Sanket Mohapatra said. He added that the period of study of bank level data from 2002-18, though does not include Covid-19 period per se, but covers financial crises like global financial crises and European debt crises.
Highlighting the trend in India’s context, he said, “RBI’s recent report says India’s gross Non Performing Asset (NPA) ratio could rise to 12.5 per cent. For the banking system to continue lending to corporate sector will need adequate capital thus making it important to raise additional capital from the market. We need a well-capitalised banking system.”
“About half of bank loans to households in India comprise housing loans, which are secured loans (backed by the property as collateral), and hence viewed as less risky compared to corporate loans,” prof Mohapatra said.
The observed shift in bank lending portfolios contributes to a better understanding of the impact of changes in the macroeconomic environment on financing outcomes at the micro-level, the report states.
Prof Mohapatra said, “While banks reallocate their lending portfolios towards household loans in response to higher economic policy uncertainty (EPU) on average, it revealed that the shift is not uniform across all types of banks. The increase in the relative share of household credit is stronger for banks with lower capital ratios and for larger banks.”
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