NEW DELHI: Even as the surge in retail loans – especially housing and vehicle loans – is making the banking regulator uncomfortable, the government seems to be happy as it feels the trend signals strong consumer sentiments.
In its Monthly Economic Review, the finance ministry says that increased demand for housing and vehicle loans reflects the confidence of the households in their future employment and income prospects.
The report pointed out that the magnitude of vehicle loans, an important indicator of growth in private consumption, has been growing at double-digits since April 2022, and housing loans have been seeing ‘a steady double-digit growth’ since May 2021.
“Households are making a smart investment choice of acquiring physical assets, taking advantage of larger credit availability from banks and after a long period of elevated returns in financial assets,” says the report.
It says that the real estate sector has a vast network of forward and backward linkages (such as cement and steel, among others, besides various services), the increase in demand for housing is inducing broad-based growth and job creation.
The banking regulator – Reserve Bank of India – however, has asked banks and NBFs to be cautious with personal loans recording high growth.
Noting that certain components of personal loans are recording very high growth, the RBI governor Shakti Kanta Das in its monetary policy statement earlier this month said that RBI is closely watching these loans for any signs of incipient stress.
“Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” he said in his statement.
According to the report, outstanding NBFC retail loans witnessed a growth of 29.6% in FY23, with 36% NBFC’s retail loans being used for the purchase of vehicles. Lending by NBFCs to the household sector rose from ₹0.2 lakh crore in FY22 to ₹2.4 lakh crore in FY23, a jump of nearly 11.2 times.
In August, retail loans rose by 18.3% year-on-year and remained the prime contributor of overall credit growth. Credit to the housing sector recorded consistent double-digit expansion (13.8% in August) while vehicle loan growth strengthened to 20.6%. Credit card loans maintained high growth (30.0% in August) reflecting inter alia the buoyancy in demand from contact-intensive services
Michael Debabrata Patra, the deputy RBI governor, in one of his recent speeches said that conventional wisdom suggests that retail loans being diffused across a wide borrower base mitigate the accumulation of systemic risk, but the RBI is watchful as herding by banks in the retail loan space might lead to potential cascades across the system if defaults do occur.