How Much Unsecured Credit Is Too Much?

Typically, the average Indian did not like to be too leveraged and approached institutional financing for major life investments, like a car or a home. But that's quickly changing. 

Since June 2021, growth in unsecured borrowing from banks i.e. credit card debt and unsecured personal loans, has outpaced growth in secured credit, data from Reserve Bank of India showed.

As of December 2022, for instance, unsecured loans grew by 24% year-on-year to Rs 12.2 lakh crore, while total retail credit rose by 20.17% year-on-year to Rs 39.35 lakh crore. Overall, non-food credit saw an uptick of 15% in the same time period to Rs 132.5 lakh crore.

The pace of growth in unsecured credit has been very surprising for investors as well, an executive at a private equity firm which invests in Asian banks told BQ Prime, on the condition of anonymity.

While there has been no adverse movement in asset quality so far, if bad loans start ballooning, the growth can also hurt lenders, the person quoted above said.

But, is all that consumption-led unsecured credit growth good for the economy?

Expansion in retail credit has powered much of systemic credit growth over multiple quarters and has also helped banks expand their interest margin. But, a sharp and quick expansion in unsecured loans can also foster risks as these loans are not backed by any collateral. 

"At this moment, we will not say that it (unsecured credit) is overheating. Because the proportion has not become very, very high," Aniket Dani, head of research at Crisil Rating Information Services of India Ltd., said. Asset quality has also held up in the segment, he said.

Typically, the average Indian did not like to be too leveraged and approached institutional financing for major life investments, like a car or a home. But that's quickly changing. 

Since June 2021, growth in unsecured borrowing from banks i.e. credit card debt and unsecured personal loans, has outpaced growth in secured credit, data from Reserve Bank of India showed.

As of December 2022, for instance, unsecured loans grew by 24% year-on-year to Rs 12.2 lakh crore, while total retail credit rose by 20.17% year-on-year to Rs 39.35 lakh crore. Overall, non-food credit saw an uptick of 15% in the same time period to Rs 132.5 lakh crore.

The pace of growth in unsecured credit has been very surprising for investors as well, an executive at a private equity firm which invests in Asian banks told BQ Prime, on the condition of anonymity.

While there has been no adverse movement in asset quality so far, if bad loans start ballooning, the growth can also hurt lenders, the person quoted above said.

But, is all that consumption-led unsecured credit growth good for the economy?

Expansion in retail credit has powered much of systemic credit growth over multiple quarters and has also helped banks expand their interest margin. But, a sharp and quick expansion in unsecured loans can also foster risks as these loans are not backed by any collateral. 

"At this moment, we will not say that it (unsecured credit) is overheating. Because the proportion has not become very, very high," Aniket Dani, head of research at Crisil Rating Information Services of India Ltd., said. Asset quality has also held up in the segment, he said.

Two among three of India's largest lenders have seen their unsecured retail loan books far outpace the growth in their secured loan book.

And the one bucking the trend might just be ahead of the curve.

As of Dec. 31, 2022, State Bank of India saw its unsecured retail lending outpace growth on the secured side. Its unsecured retail loans—comprising Xpress Credit and other personal loans—grew by 24.3% year-on-year to Rs 3.9 lakh crore in the third quarter. SBI's secured loans grew by 15% year-on-year to Rs 7.3 lakh crore over the same period.

The difference is even more stark for ICICI Bank Ltd. The private bank grew its unsecured retail loans—credit cards and personal loans—by 35% year-on-year to Rs 1.18 lakh crore, as of March 31, 2023, according to the bank's Q4 FY23 financial results. In the same time frame, the bank's total retail loans grew by 22.7% from Rs 4.5 lakh crore in March 2022 to 5.5 lakh core in March 2023.

ICICI Bank is "very comfortable with the quality of the book we have built", Sandeep Batra, executive director at ICICI Bank, said during the bank's Q4 earnings call on April 22.

Even though ICICI Bank's personal loan portfolio has grown at a rapid clip, the bank hasn't indicated that it would like to tug at its reins, according to a private banker, who spoke on the condition of anonymity. The bank's personal loan portfolio grew at an average year-on-year clip of 37.6% between Q3 FY22 and Q2 FY23.

Despite the fast-paced growth, the bank is projecting overall growth of 30% in personal loans during FY24, the private banker quoted above said.

The story changes when it comes to India's largest private lender, HDFC Bank Ltd. The bank's unsecured loans, including personal loans and payment products such as credit cards, grew by 18.8% year-on-year to Rs 2.57 lakh crore. Secured loans, on the other hand, grew by 19.6% year-on-year to Rs 3.76 lakh crore over the same period.

HDFC Bank has long been a market leader and other lenders could end up following their path over the next six to eight months, but they are yet to indicate anything in that direction, the private equity executive quoted above said.

While HDFC Bank bucks the trend, it holds true for the banking system as a whole and also extends to non-bank lenders.

"It is somewhat similar to what's happening at banks, the unsecured part is growing faster," Dani said, speaking about unsecured loan growth at NBFCs. But if unsecured loans continue growing at a similar pace, then the question would be how far the credit norms have been loosened, Dani said.

"What will drive up the delinquencies and defaults will be the way the economy pans out," Anil Gupta, co-head of financial sector ratings at ICRA said. If there is pressure on job creation or salary growth, unsecured loans could be hit, since they belong lower down in the pecking order, as compared with secured credit such as housing loans, he said.