Vijay Kumar Gaba

Household now largest borrowers

As per the latest data released by the Reserve Bank of India, the share of personal loans in total outstanding bank credit in India has grown to 27%. For the first time, the share of personal credit in the total bank credit is higher than the credit to the industry. In past 12 months, the share of personal credit has increased by 2%, from 25% in September 2020 to 27% in September 2021; whereas the share of industrial credit has declined by 1% from 27% to 26% over the same period. The share of credit to agriculture sector has remained mostly stagnant at around 12%.

The trend could be explained, inter alia, through the following three key factors:

(a)   Rising institutionalization of the personal credit due to accelerating financial inclusion and digitalization of financial transactions.

(b)   Decline in share of NBFCs in the personal credit, due to a variety of reasons.

(c)    Deleveraging of balance sheets by large corporate, due to better business conditions (primarily commodities), resolution of debt, slowdown in new capex, and better working capital management.

Personal loans growing at fastest pace

During the 12months period (September 2020 to September 2021) the personal loan category recorded the highest growth.

·         Personal loans grew 12.1% in this period, almost at twice the rate of growth in total bank credit. In the previous 12month period, the growth in personal credit was 9.2%.

·         The credit to industry grew at anemic 2.5%, though better than the previous period growth of 0.4%.

·         The growth in credit to service sector, which suffered most of the brunt of the Covid-19 pandemic induced lockdown, declined sharply to 0.8% from the 9.2% recorded in the previous period.

·         Agriculture sector credit growth remained healthy at 9.9%, as compared to 6.2% in the previous period.

Change in borrowing mix of households reflects the impact of pandemic

The change in personal loan mix during past 12months clearly indicates towards the impact of pandemic on the household finances. It highlights how the pandemic changed the circumstances, affordability and priorities of the Indian households.

Traditionally, Indian households borrowed to create assets (house, vehicle), build skills (education) or meet emergencies (medical loans). However, in past 12months vehicle, education and housing loans growth witnessed contraction.

The loans for consumer durable witnessed sharp growth. Anecdotal evidence suggests that communication devices (smartphone, laptops etc.) and household appliances may have topped the priorities of the locked up Indian households, as against borrowing for vehicles and higher education.

Institutionalization of farm credit

The total bank credit to the farm sector is about Rs16trln. Out of this, pre-harvest (only farmers) credit is Rs8trln, post-harvest is Rs5trln and agri infrastructure funding is Rs3trln.

Overall, agri credit industry is expected to grow at a CAGR of ~10+% over the next decade, as the government’s focus on materially raising the size of agri economy yields results.

In past two decades the structure of agriculture financing has witnessed remarkable changes. From mere 19% in FY01, the share of direct institutional credit to the agriculture has grown to 43% of the nominal agriculture GDP in FY21.

As per India DataHub study, “Over the past three decades, direct institutional credit (Commercial Banks and Cooperatives) to agriculture has increased more than fifty times – from Rs300bn in 1991 to Rs15,000bn as of 2021. The output from the agriculture sector has increased by less than half of this (23x) during this period. Thus, in both absolute and relative (to output) flow of institutional credit to agriculture has increased massively. Outstanding Institutional credit is now at over 40% of agriculture GDP, more than two times of what it was in the 1990s.”

FinTech gaining ground in credit market

In an industry, traditionally dominated by moneylenders, banks and cooperatives, the online lending applications (FinTech) are fast gaining ground.

As per “A review of India’s Credit Ecosystem”, a report published jointly by Experian Services India (P) Limited and Invest India –

“Fintechs have carved out their own market share by targeting customers who were earlier not eligible to borrow due to lack of credit history and lack of collateral. Improved credit evaluation processes and digitization has allowed new-age players to lend to this segment cost-effectively. This brought a whole new section of customers into the lending industry and this customer segment is far from being saturated as of now. Many financial technology companies and NBFCs have emerged solely to enable lending to the previously unbanked population, creating a niche in the industry.”

Fintechs embarked on their journey by focusing on onboarding ‘credit invisibles’ and the ‘sub-prime’ population, mostly younger generation by leveraging alternative data and advanced analytics. Customizing product portfolio as per customer’s needs and focus on small ticket size loans across the board (personal loans (PL), business loans (BL), consumer durable (CD) etc.) has proven to be game changers in driving their top line growth.”