My sister, a homemaker, wanted to buy an SUV, but she postponed the decision after her husband had a 20% cut in his salary. There are thousands of aspirational Indians like her who had to shelve their decision to buy fancy cars, apartments and luxury items, thereby contributing to the sluggish growth in bank credit in the aftermath of the pandemic.
The credit growth figures put out by the Reserve Bank of India (RBI) reflect the impact of the postponement of purchases. Loans to both retail and commercial borrowers have declined. The household stress is building up as people lose jobs and suffer salary cuts, with no increments in the offing. Industrial units are also yet to rebound to bring back the jobs lost. White-collar employees are turning cautious as jobs become uncertain.
The labour ministry told Lok Sabha on 30 September that the salaried class withdrew Rs 39,400 crore from Employee Provident Fund (EPF) between March and August 2020. This is 30% of the annual accruals of the organisation.
The total bank credit decelerated by Rs1,51,099 crore to Rs 91,12035 crore for the period March 2020 to August, according to the latest sectoral allocation of credit by 33 commercial banks compiled by the RBI. The central bank's data also showed that the year-on-year growth declined to 6% in August, while in the year ago period it was at 9.8%. Only home loans grew by a marginal Rs 10,000 crore, while car loans, credit cards and education loans fell by over Rs 800 crore each in the first five months of the financial year.
"It should not be generalised. Public sector banks have focused on employees who have salary accounts with them or companies who are clients of the banks. Most PSU banks may not have a big problem. Only lower-rung private banks who have lent to self-employed and other professionals will face a problem. Prolonged rebound of the economy is not going to impact the retail portfolio of banks in the same way. At the SBI we are not seeing a high accretion in retail NPAs. If it is 0.5% of my total retail book now, it will maybe rise 1%, but it will not balloon to 5% or 6% for any of the banks, said SBI managing director of retail and digital banking Challa Sreeivasulu Setty told Indianbankingnews.com.
The year on year growth of retail loans is still at 10.5%, but much lower than the 15.6% posted last year.
Demand slowdown and a supply glut is forcing industry to slow down production and borrow less. Some of the companies that have raised funds are prepaying the loans and deleveraging , which is thus leading to lower credit growth.
Job losses in India continue to climb. About 21 million salaried employees lost their jobs between April and August, with about 3.3 million jobs shed in August and 4.8 million in July, the Centre for Monitoring Indian Economy (CMIE) said. These include white-collar jobs, support staff, white-collar workers and salaried employees.
"Working capital limits are also not drawn by companies. But industrial activity has started for steel, construction and core sectors, so job losses and employment will not be major issues. There will be some stress. Retail NPAs will certainly go up but will be under control for the banking sector,"Setty said. SBI controls 20% of the bank credit in the country.
Demand slowdown and supply cut also forced large companies to borrow Rs 100988 lakh crore less between March and August. Micro and small enterprises borrowed Rs 27279 crore less, while the medium-sized companies borrowed a paltry Rs 1,788 crore during this period. The industrial bank credit growth decelerated by 4.4% to Rs 2778672 crore between March to August.
Said HDFC Bank chief economist Abheek Barua, "Retail loans are holding up well, but it would be reasonable to expect some stress in the household segment. Owing to job losses, repayments of households will suffer. The small town and rural sector is healthy. There is, however, some possibility of stress emerging in the urban portfolios of banks and even in the unsecured loans segment. The problem is compounded by a lack of demand and a huge supply. But I do not see this blowing into a huge crisis."
As per the financial stability report of the RBI published in July, the pandemic has the potential to amplify financial vulnerabilities, including corporate and household debt burdens.
RBI and SBI research shows that the short-term consumer leverage (presented as the sum of credit card, personal loans, advances against FD, shares, bonds outstanding, etc.), which had reached a peak in FY18 at Rs 1.56 lakh crore, declined significantly to Rs 1.29 lakh crore in FY19. However, during FY20, it increased marginally to Rs 1.35 lakh crore. But the trend of consumer leverage is expected in FY21. Consumer deleveraging, which had declined by a whopping Rs 53,023 crore in June 2020, has improved to Rs 14,111 crore in August.
"Now the question is how much of this consumer deleveraging is because of lockdown/lack of business and how much is because of the consumer actually maintaining a discipline in consumer behaviour. I believe this will be crucial in deciphering in which direction the asset quality of the banks is moving in FY21," SBI economist Soumya Kanti Ghosh said in the Ecowrap, a report on the economy.
Siddhartha Sanyal, economist with Kolkatta-based Bandhan Bank, said, "We have observed a remarkable resilience for our client base, which is the lower strata of the organised sector. But if you look at the pan India situation, it is expected that stress would build up in households as job losses rise. The high withdrawals from the Employment Provident Fund may be one such indication."
Asset reconstruction companies (ARCs) are saying that the tipping point has reached, with banks showcasing the retail NPAs as part of their asset sales. How well banks manage the household stress remains to be seen, because banks have put many loans under moratorium in the first part and been asking others to come forward for restructuring. The next two quarters will show if the household stress is spilling into the bad loan pool.
