Reserve Bank says high proportion of retail credit poses systemic risk
NEW DELHI: The banking regulator has raised concerns about the growing share of retail loans in total bank credit as it feels the trend can be a source of systemic risk. In the latest bulletin, the Reserve Bank of India has noted that outstanding retail loans at the end of March 2023 more than doubled in five years to R40.85 lakh crore, even as their share in the aggregate credit had increased from 24.8% in March 2018 to 32.1% in March 2023 (the highest among the sectors).
The report noted that in the long term, such concentration portfolio strategies (of banks) can result in the emergence of systemic risks. It further says that retail loan portfolio concentration risk can arise from loan stacking, wherein borrowers can avail of loans from many lenders, which over time can adversely affect the borrower’s capacity to repay.
Retail loans in FY23 grew at a healthy rate of 20.6% compared to 12.6% in the previous year. The growth rate was almost the same in the pre-covid year of FY19. “The month-on-month cumulative growth momentum build-up for 2019-20 to 2022-23 covering the pre-COVID period and post-COVID recovery period revealed that there was sustained growth of retail loans in 2022-23. Scheduled Commercial Banks (SCBs) gained the pre-COVID momentum in 2022-23 gradually with the ebbing of the pandemic period,” says the RBI report.
However, the report also noted that the ongoing ‘retail-shift’ is not permanent, but cyclical in nature and the (retail) credit growth may not continue to be high. It noted that banks’ expectations of retail credit demand have moderated, and loan terms and conditions are expected to be tightened in the third quarter of FY24.
The report concludes that the retail credit segment and its major constituents (housing and vehicle) are sensitive to interest rates and the asset quality of the bank’s loan portfolio. “Housing loans are more sensitive to both interest rates and asset quality than vehicle loans for the same period. So far, the relatively better asset quality in the sector may have fuelled retail credit growth,” the report says.