Explained: Personal loans are increasing, but is now the time to get one?

Amid overall sluggish credit growth over the past year in the wake of the pandemic and slowdown in economic activity, the retail credit segment has picked up sharply, suggesting an increase in household debt with declining cash flows for individuals.

How was the growth?

According to RBI data, the outstanding credit 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. Over the same period, the overall credit growth of banks increased by only 6, 7%.

The resolution shows that growth was spearheaded by “other” personal loans (which mainly include personal cash advances), consumer durables, and gold jewelry loans. Gold jewelry outstanding loans rose sharply 59.1% from Rs 40.086 billion in September 2020 to Rs. 63.770 billion in September 2021, and “other” personal loans rose 18.2% from Rs 7.17.414 billion in September 2020 at 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 segments over the past four years and has more than doubled from an outstanding value 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.

Durable consumer goods loans increased 40% over the past year, from Rs 7,788 billion to Rs 10,904 billion.

What does it indicate?

Bankers say the rapid pace of credit growth in other personal loans between 2014 and 2019 suggests an expansion in the consumption-driven economy and a resurgence in demand for personal loans in the Covid year (September 2020 to September 2021) and a sharp surge in demand for credit against Gold jewelry indicates the burden on individual income streams and cash flows of micro, small and medium-sized enterprises.

Demand for consumer staples and other personal loans has only continued to rise in the last two months of the celebrations, while new demand is more likely to be driven by optimism about the recovery of the economy and the certainty of their future income / cash flows, say bankers .

the Leap in gold creditsExperts say it is more due to the stress that small business units have faced over the past year. For many units in all industries, the decline in demand affected their cash flows and their ability to pay employees. The pledging of gold as collateral to meet funding needs is a constant feature of the Indian gold market; small businesses use them for their working capital needs.

Why is lending to retail customers growing?

A further improvement was expected due to the festival season, with consumer confidence rising due to the lower interest rate scenario and a gradual opening of the economy. However, any additional wave of Covid could limit growth. With the banking system also filled with liquidity and with the industry’s borrowing still lackluster, bankers are pushing for growth in personal loans.

Interest rates in particular fell across the board for home loans which are now 6.40% available from public banks such as Union Bank. Public sector entities SBI and BoB have also focused on unsecured loan growth through their digital platforms. The housing loan segment was also driven by growth in affordable housing. In addition, the defaults in this loan segment are the lowest. Banks are showing more interest in gold loans as this collateral can be auctioned off when a loan becomes a distressed asset.

Should one borrow for consumption?

With the economy not yet completely out of hand, individuals should avoid borrowing for non-essential consumer goods. If incomes remain under pressure, it means these are times to hold up cash for an emergency rather than increase debt liability. Borrowing to make up for declines in income is a bad idea, and credit for non-essential consumption is even worse.

Taking out a consumer loan or to finance a wedding may not be a good idea as repaying it can be difficult when income is under pressure. Credit cards outstanding increased by around Rs 10,000 billion in a year to Rs 115,641 billion by September 2021. Since card companies and banks charge over 40% interest on such outstanding amounts, this can add to the financial burden on consumers. “Demand for and access to consumer credit have undergone a paradigm shift in recent years, with post-pandemic circumstances further accelerating that shift,” said Rajesh Kumar, TransUnion Cibil MD and CEO.

What is the assessment of the RBI?

RBI has already warned of the asset quality of banks’ retail portfolios and has demanded that the basket be closely monitored. Consumer credit deteriorated after the credit moratorium program expired in September 2020. The customer risk distribution of the credit-active population shifted slightly in the direction of the high-risk segment in January 2021 compared to January 2020. even low-risk tiers show a downward dynamic. “Non-PSB consumer loan portfolios are starting to see signs of stress. Consumer credit demand also appears to have been dampened by the second wave of the pandemic. In the future, close monitoring of the asset quality of MSMEs and retail portfolios of banks is justified, ”said RBI in its report on financial stability published in July.

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About Natalee Broderick

Natalee Broderick

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