India’s bank credit growth has been powered by retail lending over the last few years and this is cyclical in nature, according to a Reserve Bank paper.

“Retail bank credit has emerged as a major contributor to the overall bank credit growth, especially after the onset of the COVID pandemic,” said an article in the RBI’s June bulletin released on Friday.

As per the article, the latest statistics on retail lending portfolios of the banks signalled increased focus by the banks on the retail credit sector.

But surveys conducted by the RBI also indicate that banks' assessments of retail credit demand in the March quarter and expectations for demand in the December quarter of this fiscal have both moderated, it said. 

The article was authored by Sujeesh Kumar and Manjusha Senapati from the RBI's monetary policy department.

Empirical assessment of the retail credit cycle indicates that the ongoing retail-shift is cyclical and not permanent. An analysis of quarterly data points to the sensitivity of retail lending to interest rates and the asset quality of banks. So far, the relatively better asset quality in the sector may have fuelled retail credit growth, the article said.

“Amongst the categories of retail credit, housing loans are found to be most sensitive to interest rates and asset quality of banks, followed by vehicle loans and unsecured loans,” it added.

Some recent empirical studies have shown that in the second half of the last decade, expansion of credit to the non-industrial sectors—mainly housing and credit cards—has driven the overall non-food credit growth, according to the article.

In the long term, such concentration of credit growth in retail or co-movement of portfolio strategies among banks can result in the emergence of systemic risks. 

Another retail loan 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, it said.

At the end of April, bank retail loans grew 19.4% year-on-year to Rs 41.19 lakh crore. Non-food bank credit stood at Rs 138.3 lakh crore, up 16.1% year-on-year.

The share of retail loans by banks in aggregate credit has increased from 24.8% in March 2018 to 29.7% in April this year. However, it is down from a 32.1% share for retail credit in March 2023.