Do Indian banks have a retail loan problem?
Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.?
Check out the audio here:
And the video is here.
In today’s episode, we look at 3 big stories:
Are unsecured loans a problem?
In the recent RBI policy meet, Governor Shaktikanta Das made several noteworthy statements, but his comments on unsecured and personal loans were particularly striking. He said:
"It is observed that the sectors in which pre-emptive regulatory measures were announced by the Reserve Bank in November last year have shown moderation in credit growth. However, certain segments of personal loans continue to witness high growth. Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans."
As we're in the middle of the earnings season, major banks have announced their results, revealing some interesting developments regarding unsecured and personal loans. But first, let's take a quick look at the overall credit growth in the banking system. Overall credit growth was steady at 15% year-on-year in June, while deposits grew at 12% year-on-year. A few weeks ago, the RBI governor expressed concerns about the gap between deposit growth and loan growth rates.
Breaking down the credit growth reveals some intriguing trends. Retail lending as a whole is growing at 17% year-on-year, having moderated from well over 22%.?
Source: Nomura
However, the situation with unsecured lending is quite dramatic. Around the same time last year, unsecured loans were growing at well over 30% year-on-year, but now they have fallen to 15%. This decline highlights how much retail lending surged after the pandemic and how it is now slowing down due to RBI's measures in November 2023 and its ongoing concerns about unsecured lending growth.
Source: Nomura
Now, let's look at the banks. Instead of delving into numbers, I'll highlight the directional trends. Private banks are starting to see some stress in unsecured loans and credit cards. Axis Bank experienced an uptick in non-performing assets, with 88% of incremental bad loans or slippages coming from retail loans. RBL Bank also saw an increase in bad loans due to stress in credit cards and microfinance. Similarly, Federal Bank and Kotak Mahindra Bank reported bumps in bad loans within their retail lending books. Kotak Bank noted that some small-ticket consumer, retail, and unsecured loans went bad because customers were taking multiple loans from different lenders.
Among public sector banks, Central Bank, Indian Bank, and Bank of India reported stress in their unsecured and retail loan books.
So, what's happening? It's not yet clear if there's a significant retail loan problem in the Indian banking system. Some stress has only emerged in the last two quarters, so there's limited data. Additionally, the recent elections and severe heat waves might have seasonal effects.
Experts have pointed out that small retail loans under ?50,000 might be in trouble. These loans have grown rapidly due to their higher interest rates, as banks work to improve their margins. The RBI's recent financial stability report highlighted concerns, noting that in retail loans, fintech lenders, especially NBFCs, had high delinquency rates of 8.2%.?
Source: RBI
For context, the total gross non-performing asset ratio of the Indian banking system was 2.8%.
Source: RBI
However, these small-ticket loans are not a systemic concern. India Ratings and Research recently noted that loans under ?50,000 account for only 0.4% of the total outstanding retail loans. They further wrote:
"Overall, the asset quality of outstanding credit showed an improvement on a year-on-year basis in FY24, except for personal loans. Credit card asset quality broadly remained the same. Delinquency levels remain low across product categories, with the share of low-rated borrowers (below prime and new-to-credit borrowers) in incremental credit continuing to decline."
So why is the RBI worried? Maybe the RBI is just being cautious, or it’s seeing something we are not. It could also be that certain consumer segments are borrowing money to finance consumption due to rural economic distress, heatwaves, poor monsoons, layoffs, and weak employment growth.
We'll have to wait and see if unsecured and retail loans become a systemic issue.
Roti Rice Rate
Remember yesterday when I talked about the changes in the weightage of food in India’s CPI basket?
In case you missed it, no worries. Here’s a quick recap:
The Ministry of Statistics and Programme Implementation is considering updating the composition of India’s CPI (Consumer Price Index) basket. The current CPI is based on data from 2011-12 and still includes outdated items like “horse cart fee” and “video cassettes.”
The CPI basket comprises 299 items that Indians consume regularly. Inflation is calculated by looking at how the price of this basket changes over time.
But here's the thing—inflation can be a bit arbitrary. We all have different consumption habits and don't consume all 299 items in the basket. Therefore, the same inflation number doesn't apply to everyone equally.
However, one consumption habit that is almost universal among Indians is food.
Food, along with energy, is also the most volatile segment when it comes to inflation. The business of food involves growing living things, which introduces multiple variables in its production and consumption. This makes studying food consumption separately from the overall CPI basket quite interesting.
Ratings agency CRISIL releases a monthly report called "Rice, Roti and Rate." This report calculates the average cost of preparing a vegetarian and non-vegetarian thali that an average Indian consumes. It includes cereals, pulses, chicken, vegetables, spices, edible oil, and cooking gas, making it a good representation of how India eats. Since it factors in the price changes of everything that goes into our food plates, it's a reliable indicator of food inflation.
From June to July 2024, the cost of a non-vegetarian food plate increased by 6%, while the cost for vegetarians jumped by 11%. The rise in veg thali prices was due to the increased prices of tomatoes, potatoes, and onions. Month on month, tomato prices rose by 55%, onions by 20%, and potatoes by 16%.
Tomato cultivation was affected by the brutal heat waves that ravaged key tomato-growing regions like Karnataka. The same was true for onions, while potato harvests were affected by disease infestation.
Source: CRISIL
Although the report doesn’t explicitly state it, it indirectly highlights several important trends and factors that affect our food consumption and spending.
First, there’s the stubbornly high food inflation, which has been steadily increasing the prices of key food items. This year, food and beverage inflation has consistently remained above 7% since January. In fact, food inflation accelerated last month, even as core inflation (which excludes food and energy) hit record lows. This persistent food inflation is a key reason why the RBI didn’t cut rates yesterday.
Second, the report puts a rupee value on the impact of abnormal and brutal heat waves caused by climate change. When we think of climate change, we often consider temperature, pollution, and so on.
But it directly impacts our wallets. As climate change worsens, our food supply systems will be pushed to the brink. Crop failures, pest infestations, shortages, nutritional deficits, and other serious issues will become more common and severe, as agriculture is one of the sectors most vulnerable to climate change.
These trends underscore the importance of understanding and addressing the root causes of food inflation and climate change, as they have direct and significant impacts on our daily lives and finances.
Did Reliance fire thousands of people?
Yesterday, there was a lot of buzz about Reliance reducing 11% of its workforce. People were quick to assume that this highlights the unemployment problem in India.
But does it really?
Reliance is India's largest company in terms of market capitalization. So, if Reliance is hiring or firing people, it matters to the overall economy.
So, what’s happening? Let me break it down for you.
According to their annual report, Reliance's employee count has decreased by more than 40,000 this year. That's about 11% of their total workforce! While the number of employees in Reliance's Oil to Chemical and Exploration & Production businesses increased, the number of employees working in Reliance Jio and especially Reliance Retail significantly decreased.
Most of the layoffs were in Reliance’s consumer businesses, like Jio and Reliance Retail.]
(2022-23)
(2023-24)
Interestingly, the drop isn’t because of layoffs, as most people might assume. Two things are happening:
Let me explain.
In 2022-23, Reliance hired about 2,60,000 new employees, but in 2023-24, they hired only 1,70,000. If you compare the data for both years, Reliance’s attrition rate hasn’t changed significantly. This suggests a shift in their hiring strategy.
The likely reason is that Reliance’s newer business initiatives, like Jio and Retail, are maturing. For context, Reliance Retail currently employs about 60% of the company’s total employees, and Jio employs about 25%—much more than the number of employees in Reliance’s mega oil-to-chemicals business.
As businesses move from a hypergrowth stage to maturity, they often enter autopilot mode. Therefore, it’s possible that Reliance no longer requires as many employees for its consumer businesses.
A drop in employee count by more than 10% could also indicate that Reliance is temporarily shifting its strategy from making new business investments to using its position to establish a stronger market footing. While they’re not firing, they’re also not aggressively hiring.
An analyst that the Economic Times spoke to said, and I quote, “The new lines of businesses have matured now and have significant support from digital initiatives. Now, they are at a stage to better manage operations with optimum strength. It doesn't mean that the numbers won't increase when new business opportunities emerge and strategy changes. They understand very well how to drive cost management and efficiency.”
But all said and done, this is only an estimate based on one year’s data. This might be the start of a larger trend, but it could also end up being a one-off case.