Retail Credit Portfolio Of Banks Likely To Come Under Stress

Shobha Roy

The outbreak of Covid-19is likely to cast a shadow on the retail credit portfolio of banks in India. While it is difficult to ascertain the extent of the impact, however, senior bank officials and industry experts anticipate a slowdown in retail credit offtake and also a possible spike in non-performing assets (NPA), thereby impairing the asset quality of banks.

According to Krishnan Sitaraman, Senior Director, Crisil Ratings, growth in disbursements to the retail sector may get affected as the underlying feelings of borrowers buying a home or vehicle or taking a personal loan, say for travel, could get impacted by the ongoing crisis.

“It is difficult to fully estimate the actual impact; we need to wait and watch. The impact could be both on business growth and asset quality front, and it (impact) could be higher if the situation continues longer,” Sitaraman told BusinessLine.

The total outstanding bank credit as on January 31, 2020, stood at ₹89.78 lakh crore, a growth of 8.5 per cent when compared to ₹82.75-lakh crore as on January 18, 2019. Retail credit, which includes personal loans, housing, vehicle, and education loans, among others, accounted for around 28 per cent of the total bank credit at ₹24.97-lakh crore.

Since there was not much demand for credit in corporate sector, banks have been deploying funds in the retail sector, which has been witnessing a good demand, said Pallav Mohapatra, MD and CEO, Central Bank of India. “If this logjam in the economy continues, then definitely all the segments will be impacted,” he said.

In its publication, Operations and Performance of Commercial Banks, released on December 24, 2019, the RBI talks about the possibility of a rise in defaults among retail segments with growth slowing down.

“While banks have oriented their lending towards the relatively stress-free retail, the slowdown in private consumption spending has imposed limits to this growth strategy, even as the possibility of default among retail segments rises as growth slows down,” the central bank said.

While there might not be much of an impact on the asset quality as far as loans extended to the salaried class are concerned, however, the self-employed segment could be affected as their businesses may get affected and cash flows impacted.

“But this is an evolving situation and you will need to continuously evaluate the situation,” said Sitaraman. Overall banking credit growth, which was largely driven by the retail sector, could also come down if the situation continues for long, he added.

According to a senior bank official at a public sector bank, if the shutdown continues in April, then the resultant slowdown and impact on economy could lead to job losses. This will further impact the asset quality of retail loan book.

“A lot of corporate groups are under stress, so if layoffs happen, then it could have a spill over effect (on retail loan book),” said Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA.