As consumerism takes off in the country, demand for credit card loans has also been galloping at a brisk pace over the past decade. But the strong growth in these loans is accompanied by surge in bad loans. Slippage ratio was the highest in the credit card loans in the years following the pandemic. Loans, which have been technically written off, are also very high in this segment. 

A paper titled “Dynamics of Credit Growth in the Retail Segment: Risk and Stability Concerns,” published in the January 2024 RBI bulletin has evaluated the growth and stress in various categories of retail loans in two periods — pre-Covid period (March 2015 - December 2019) and post-Covid period (December 2021 to June 2023). 

“Contrary to the credit growth, stress levels, as depicted by GNPA ratios, and slippage ratios, in retail portfolios dipped during the post-Covid-19 period. However, credit cards and vehicle loan portfolios did record a moderate, but statistically significant, rise in stress”, noted the report. 

Credit growth in credit card loans witnessed a slight decline from 29.78 per cent in the pre-Covid period to 24.99 per cent after the pandemic. This dip could be due to alternative financing options like BNPL (Buy Now Pay Later), according to Akshar Shah, Founder and CEO of Fixerra, a fintech start-up. 

Deteriorating asset quality 

The slippage ratio, which indicated the incremental additions to bad loans every year, is the highest in credit card loans among all retail loan categories. This ratio has increased from a pre-pandemic number of 3.47 to a post-pandemic number of 7.12. GNPA ratio in credit card loans has risen from a pre-pandemic number of 1.52 to 1.96 post-pandemic. 

This indicates that borrowers are more willing to default on their credit card loans. “Typically, borrowers are far more likely to delay or default on credit card repayments when compared to other secured products where the risk of repossession of the underlying assets acts as a deterrent,” said Aashay Choksey, Vice-President and Sector Head- Financial Sector Ratings, ICRA Ltd. 

The sector has also seen an increase in the GNPA+TWO (Technical Write-Offs) ratio. Technical write-offs are the removal of non-performing assets from books of accounts, though they remain borrowers of the bank. 

The GNPA+TWO ratio in credit card loans increased from a pre-pandemic (March 2015 - December 2019) number of 11.63 to 13.28 post-pandemic (December 2021 - June 2023). This means that more and more credit card loans are being considered irrecoverable and are being written off. 

“Moratoriums and loan restructurings during the pandemic masked an underlying financial stress, which is now resurfacing as support measures expire,” says Shah. 

Another worrying trend noted in the report is that ‘below prime’ borrowers (whose repayment capability is lower) are taking more credit card loans. “In the case of credit cards, per live borrower credit outstanding is higher for the below prime borrowers, suggesting a higher flow of credit to relatively riskier borrowers,” notes the report. 

The author is an intern with businessline