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Retail loans drive loan market in India

Corporate loans declined 4 percent year on year


Retail loans, which are provided to individuals from a bank or any financial institution, continue to drive loan growth in India while corporate loan performance remains muted, as per the latest data for FY2021 from the Reserve Bank of India (RBI). 

Interestingly most of the demand came from the smaller ticket segments. As per the RBI data, retail loans are the main source of loan growth for the loan market and stood at 14 percent year on year growth while corporate loans declined 4 percent year on year. 

As per the RBI report near-term growth outlook is unlikely to recover sharply as a rebound in corporate credit (credit or term loans) is still not visible in the market. Besides this balanced growth was seen across geographies but metropolitan areas are still not ready to leverage with most of the growth happening in rural and semi-urban areas. The report observes that there is greater focus on reducing ticket sizes and at the same time housing continues to show impressive growth among all retail asset classes with a healthy mix between volume and value growth. The RBI report further points out that loan growth is being driven by the retail or the SME side instead of the corporate sector. A strong growth in ticket sizes of up to Rs 40 million is expected. On the other hand a large slowdown for loans with ticket sizes of more than Rs100 million is possible. 

As per a recent report by the Kotak Institutional Equities though the loan growth has slowed but getting granular. At the same time the loan growth during Covid has been quite weak ending FY 2021 at 5 percent year on year. The share of bank credit to industry has also declined steadily and significantly (down from 42 percent in FY2014 to 28 percent in FY2021) as the banking system went through the corporate NPL (non-performing loan) cycle. The increased liquidity in the bond markets also resulted in lower preference for bank credit from corporates in the past couple of years.

The Kotak report observes that the decline in corporate credit is uniform for public and private banks and has largely been offset by an increase in retail credit. The report quoting the studies from the RBI study observes that the loan growth in metro markets is the weakest. The Kotak report has observed that the slowdown in growth was visible for all banks. Public banks have been reporting weak loan growth for nearly five years as they have been correcting their balance sheets which were impacted by the corporate NPL cycle (led to many banks to come under PCA framework which was then followed by merger of public banks), private banks too have seen a similar trend but mostly post Covid. The slowdown in private banks is skewed with large private banks like HDFC Bank and ICICI bank reporting solid growth and several banks like Yes Bank, RBL Bank, IndusInd Bank reporting subdued or negligible loan growth.

Experts at Kotak Institutional Equities expect that retail loans will post 15 percent CAGR over FY2022-25. Experts point out that the recent growth trends in retail bank credit have been a bit depressed due to the Covid pandemic. However, growth seems to be recovering now. Experts at Kotak also expect that housing loans, credit cards and other personal loans will lead the growth within retail bank credit. It was also observed that housing loans continue to be the largest segment and private banks have recently become more active in this space. At the same time it is expected that credit cards or unsecured loans will see the fastest growth at 25 percent CAGR in the retail portfolio, but their contribution to the overall retail portfolio is relatively low at 5-6 percent. Kotak experts are bullish about this space, considering that it is expected to be a far more profitable portfolio than other products. Interestingly the Kotak report also points out that there is a marked increase in demand for medium to long term loans and there is a change in preference for medium to long term loans as compared to short term loans in the previous decade. 

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