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Monday, November 29, 2021

Explained: Personal loans are growing, but is this the right time to take one?

According to RBI data, the credit outstanding for the personal loan category increased by 12.1% from Rs 26 lakh crore in September 2020 to Rs 29.18 lakh crore in September 2021.

Written by George Mathew , Sandeep Singh | Mumbai, New Delhi |
Updated: November 12, 2021 8:34:57 am
The demand for consumer durables loan and other personal loans has only grown further over the last two months of festivities.

Amid sluggish credit growth overall over the last one year in the wake of the pandemic and decline in economic activity, there has been a sharp revival in the personal loan (retail) segment, highlighting a rise in household debt as cash flows for individuals declined.

How has the growth been?

According to RBI data, the credit outstanding for the personal loan category increased by 12.1% from Rs 26 lakh crore in September 2020 to Rs 29.18 lakh crore in September 2021. In the same period, the overall bank credit growth increased by only 6.7%.

The break-up shows the growth was led by ‘other’ personal loans (which mostly comprise cash loans for personal use), consumer durables and loans against gold jewellery. The outstanding for loan against gold jewellery rose sharply by 59.1% from of Rs 40,086 crore in September 2020 to Rs 63,770 crore in September 2021, and that for ‘other’ personal loans jumped by 18.2% from Rs 7,17,414 crore in September 2020 to Rs 8,47,788 crore. This was better than the 11.4% growth between September 2019 and September 2020, but lower than the 21.9% growth between August 2018 and August 2019. This segment has been one of the fastest growing over the last four years, more than doubling from an outstanding of Rs 4,11,100 crore in August 2017 to Rs 8,47,788 crore, and quadrupling from Rs 2,05,200 crore since 2014.

Loan for consumer durables shot up by 40% from Rs 7,788 crore to Rs 10,904 crore in the last one-year period.

What does it indicate?

Bankers say that the high pace of growth in credit outstanding in other personal loans between 2014 and 2019 indicated an expansion of consumption driven economy, and the revival in demand for personal loans in the Covid year (September 2020 to September 2021) and a sharp rise in demand for loan against gold jewellery indicates the stress in individual incomes flows and in cash flows of micro, small and medium enterprises.

The demand for consumer durables loan and other personal loans has only grown further over the last two months of festivities, while the fresh demand is more driven by optimism around revival of economy and certainty of their income/cash flows going forward, bankers say.

The jump in gold loans, experts say, is more on account of stress faced by small business units over the last one year. For many units across industries, the decline in demand impacted their cash flows and ability to pay employees. Pledging gold as collateral to meet financing needs has been a constant feature of the Indian gold market; small businesses use them for their working capital requirement.

Why is retail credit growing?

Continued improvement was anticipated due to the festival season, with consumer confidence higher on account of the lower interest rate scenario and a gradual opening of the economy. However, any additional Covid wave could limit growth. As the banking system is also flush with liquidity, and credit offtake by the industry remains lacklustre, bankers are pushing retail loans for growth.

Interest rates have fallen across the board, especially for home loans that are now available at 6.40% from public sector banks such as Union Bank. Public sector units SBI and BoB have also been focusing on unsecured loan growth through their digital platforms. The housing loan segment was also driven by growth in affordable housing. Besides, delinquencies are the lowest in this loan segment. Banks are showing more interest in gold loans as this collateral can be auctioned if a loan turns a non-performing asset.

Should you borrow for consumption?

With the economy not completely out of the woods yet, experts say individuals should avoid borrowing for non-essential consumption items. When incomes continue to be under stress, they say these are times to preserve cash for contingency and not to enhance debt liability. Borrowing to make up for a dip in incomes is a bad idea, and borrowing for non-essential consumption is even worse.

Taking a loan for consumption needs or to fund a wedding may not be a good idea because repayment might be difficult if income is under stress. Credit card outstanding has risen by around Rs 10,000 crore in a year to Rs 115,641 crore by September 2021. Since card companies and banks charge over 40% interest on such outstanding, it can add to the financial burden of consumers. “Consumer credit demand and access has undergone a paradigm shift over the last few years, with the post-pandemic circumstances having further accelerated this change,” said Rajesh Kumar, TransUnion Cibil MD and CEO.

What is the RBI’s assessment?

The RBI has already warned about the asset quality of retail portfolios of banks and called for close monitoring of the basket. Consumer credit deteriorated after the loan moratorium programme came to an end in September 2020. Customer risk distribution of the credit-active population underwent a marginal shift towards the high-risk segment in January 2021 compared to January 2020. In terms of credit risk migration, even low-risk tiers are showing a downward momentum. “Consumer credit portfolios of non-PSBs are seeing incipient signs of stress. Consumer credit demand, too, appears to have been dented by the second wave of the pandemic. Going forward, close monitoring on asset quality of MSME and retail portfolios of banks is warranted,” the RBI had said in its Financial Stability Report released in July.

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