Money & Banking

Credit cards and personal loans trebles in five years

Radhika Merwin BL Research Bureau | Updated on January 25, 2020

Unsecured loans continue to grow by 20-25% even as lending to corporates remains muted

There has been a lot of noise over the muted bank credit growth in recent times. But even as the overall growth in credit has plunged to about 7 per cent currently (as of November 2019), there are some segments that continue to grow at a robust 20-25 per cent.

Unsecured loans such as credit cards and personal loans have grown at a scorching pace over the past four years. The outstanding loan amount for credit cards stood at ₹1.05-lakh crore as of November, more than thrice the peak levels of 2008, after which unsecured loans had taken a beating. Personal loans stood at about ₹6.75-lakh crore, nearly six times the peak level of ₹1.14-lakh crore in 2008.

Credit cards, which saw a sharp fall in FY10 and FY11 after the peak levels in FY08, have been growing steadily, at a CAGR of 30 per cent, since FY15. Other personal loans, too, have been growing at a robust 27 per cent CAGR over the past four years.

The share of credit cards and other personal loans in the retail loan portfolio has gone up significantly due to the steep growth over the past four years. Credit cards and other personal loans, that were less than a fourth of the retail loan portfolio until FY15, now constitute about 32 per cent (as of November 2019).


Unsecured loans shoot up

Bank credit growth had slowed sharply in FY15 to 8 per cent levels (from 13-14 per cent in the previous two years). Since then, bank credit growth has been in single-digits, barring a slight uptick in March 2019. The key reason for the steep fall in credit growth has been the lacklustre lending to the corporate segment — between FY16 and FY18 credit growth to corporates/industry ranged between -2 per cent and 2 per cent. Over the past one or two years, growth in this segment has remained subdued at around 6 per cent levels.

But unsecured loans such as credit cards and personal loans have remained unscathed by the overall gloom. Since FY15, credit cards and personal loans have grown by nearly 30 per cent annually. The strong traction has continued in the current fiscal as well, with these segments growing 20-24 per cent despite the overall slowdown in lending and consumption blip.

While banks growing their retail businesses — at a time when the investment climate is tepid and corporates are struggling with weak balance-sheets — may only seem natural, the risk from a huge unsecured loan portfolio can be damaging.

During the financial crisis of 2008, many private banks had burnt their fingers from large unsecured loans.

Lessons of 2008

From the late 1990s to about 2005-06, retail lending in India boomed, growing over 25 per cent annually, due to factors such as increased competition and higher disposable incomes. Banks’ perception of low risk in such loans had also led to the unbridled growth.

In the two fiscals before 2008, retail loans grew 30-40 per cent, with all segments firing including personal loans and credit cards. But in 2008, the risk with large unsecured loans came to the fore. Many private banks took tough calls to write off unsecured loans, and retail loan growth slipped to a modest 4-5 per cent in 2009 and 2010.

The credit card business, which had peaked at ₹30,000 crore in 2008, had almost halved by 2011. After the sharp run in the past four years, the credit card business is now thrice that of the levels seen prior to the global financial crisis.

Published on January 24, 2020

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