How Much Unsecured Credit Is Too Much?

"Stretch your legs as much as the mat allows you to," is probably the best Hindi proverb to describe the borrowing habits of Indians, or at least it used to be. 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.."If we leave aside Covid-19, what we see is the ability of these lenders to recover a higher amount in unsecured loans off default, as compared to a secured loan given out to a corporate," Gupta said. Unless the borrower is really not in a position to repay or is a total fraudster, banks won't see losses on these loans, he said.Unsecured personal loans are also margin-accretive for banks, given the higher rates of interest they carry.Despite outpacing growth in secured credit for a sustained period of time, fresh growth in unsecured loans is likely to remain buoyant as indicated by data on inquiry volumes from credit bureau TransUnion CIBIL..According to data from the bank lending survey conducted by the RBI, which was released earlier this month, a majority of the bankers continue to expect a "moderate increase" in personal credit, overall. With inquiries slowing for home loans, auto loans and two-wheeler loans, it's likely that the growth might be powered by unsecured retail lending. Some tightness in lending standards for personal loans and credit cards have begun to emerge though. Lenders tightened their approval rates for personal loans from 28% to 21% between December 2021 and December 2022, according to TransUnion CIBIL. In the same period, credit card approval rates also fell from 25% to 21%. But, both these reductions could also be partially driven by a growing denominator of inquiries, TransUnion's report said. If growth in unsecured loans persists at the same clip over the next two financial years as well, then it could be a cause of concern, Dani said. But, by then, one cycle of the unsecured loans would have churned over as well, giving lenders a decent idea of their performance, he said. For now, banks are drawing comfort from the fact that asset quality has held up in the unsecured segment so far. ICICI bank, though, raised its provisions—other than tax—by over 51% year-on-year in Q4 FY23 to Rs 1,619 crore from Rs 1,068 crore a year earlier. The bank's provisions are solely on a prudent basis, the private banker quoted above said. Just how well unsecured credit keeps bank margins buoyant without overheating and burning their hands will likely depend on the balance between appetite for collateral-free credit and a lender's prudence.

How Much Unsecured Credit Is Too Much?

As of December 2022, unsecured loans grew by 24% year-on-year, while total retail credit rose by 20.17% on year.

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