Waiting For a Crisis?
A recent report by ratings agency ICRA Ltd says banks' share in consumer credit shrunk from 66 per cent to 55 per cent in the past six years. NBFCs increased their share from 14 per cent to 19 per cent during the same period.
- Aug 26, 2016,
- Updated Aug 26, 2016 4:11 PM IST
A credit officer of a non-banking finance company, or NBFC, was baffled by a young woman's response to a question about the end use of a personal loan for which she had applied. "I need it to buy a Louis Vuitton bag," she said, without blinking an eye. Louis Vuitton handbags cost between Rs 50,000 and Rs 3 lakh.
Gone are the days when a personal loan was a social taboo and taken only in an emergency. Today, people are borrowing for child's birthday, foreign travel, purchasing white goods, home improvement, in fact every spending that would seem discretionary to most. And why not? Loans are, after all, a click away. If a bank slams the door on you, there is always an NBFC you can turn to. And if they, too, say no, you can always approach the new online peer-to-peer lenders. After all, you live only once. "In today's world, if you haven't taken a loan, people will probably think your credit score is not good," says Manavjeet Singh, Founder and CEO of Rubique, a platform that brings borrowers and lenders together with the help of technology. "Consumers are looking for instant gratification," he says.
After the slump post the 2008 financial crisis, when a number of banks and NBFCs shrunk their unsecured loan books in response to huge defaults, the tide has turned, and that too strongly. Unsecured loans, both personal and for buying consumer durables, are back. So is the risk of banks and NBFCs taking a big hit if a chunk of these loans turns bad, just like it did after the 2007/08 financial crisis.
"We are mostly doing mobile phones under consumer durables. It's always good to test a customer with credit that is small"
According to the Reserve Bank of India, or RBI, data, unsecured credit has grown 20 per cent in the past one year. In the past five years, the growth has been 70 per cent - driven by 150 per cent rise in loans for consumer durables to Rs 17,800 crore. The largest segment, personal loans, grew 85 per cent to Rs 2.95 lakh crore during the period. According to the RBI data, the share of consumer credit in total bank credit rose from 18 per cent to 21 per cent over the past five years. The share of unsecured loans rose from 6.78 per cent to 7.4 per cent during the period. For some large NBFCs such as Bajaj Finance and Fullerton Capital, the unsecured loan book is almost half their lending book.
Still, NBFCs' unsecured loans put them at a lot of risk as these form a big chunk of their portfolios. For banks, these loans are not even 5 per cent of their loan book. Take gold loan companies. In the period between 2005 and 2012, they expanded exponentially as gold prices zoomed. The growth turned flat after prices crashed. Similarly, those big on personal loans suffered huge losses in the 2008 global financial meltdown. Russia, too, has seen many consumer finance companies suffer due to crash in commodity prices.
NBFCs defend their due diligence norms and say they run their portfolios past credit bureaus to see if the borrowers' credit profile has changed after they took the loans.
Arun Ramamurthy, Co-Founder, Credit Sudhaar, who earlier worked with Deutsche Bank, says any explosive growth comes with excesses. "The doubling of growth numbers is not sustainable, as we have seen in the e-commerce space. I think the next crisis will be in retail lending," he says.
A credit officer of a non-banking finance company, or NBFC, was baffled by a young woman's response to a question about the end use of a personal loan for which she had applied. "I need it to buy a Louis Vuitton bag," she said, without blinking an eye. Louis Vuitton handbags cost between Rs 50,000 and Rs 3 lakh.
Gone are the days when a personal loan was a social taboo and taken only in an emergency. Today, people are borrowing for child's birthday, foreign travel, purchasing white goods, home improvement, in fact every spending that would seem discretionary to most. And why not? Loans are, after all, a click away. If a bank slams the door on you, there is always an NBFC you can turn to. And if they, too, say no, you can always approach the new online peer-to-peer lenders. After all, you live only once. "In today's world, if you haven't taken a loan, people will probably think your credit score is not good," says Manavjeet Singh, Founder and CEO of Rubique, a platform that brings borrowers and lenders together with the help of technology. "Consumers are looking for instant gratification," he says.
After the slump post the 2008 financial crisis, when a number of banks and NBFCs shrunk their unsecured loan books in response to huge defaults, the tide has turned, and that too strongly. Unsecured loans, both personal and for buying consumer durables, are back. So is the risk of banks and NBFCs taking a big hit if a chunk of these loans turns bad, just like it did after the 2007/08 financial crisis.
"We are mostly doing mobile phones under consumer durables. It's always good to test a customer with credit that is small"
According to the Reserve Bank of India, or RBI, data, unsecured credit has grown 20 per cent in the past one year. In the past five years, the growth has been 70 per cent - driven by 150 per cent rise in loans for consumer durables to Rs 17,800 crore. The largest segment, personal loans, grew 85 per cent to Rs 2.95 lakh crore during the period. According to the RBI data, the share of consumer credit in total bank credit rose from 18 per cent to 21 per cent over the past five years. The share of unsecured loans rose from 6.78 per cent to 7.4 per cent during the period. For some large NBFCs such as Bajaj Finance and Fullerton Capital, the unsecured loan book is almost half their lending book.
Still, NBFCs' unsecured loans put them at a lot of risk as these form a big chunk of their portfolios. For banks, these loans are not even 5 per cent of their loan book. Take gold loan companies. In the period between 2005 and 2012, they expanded exponentially as gold prices zoomed. The growth turned flat after prices crashed. Similarly, those big on personal loans suffered huge losses in the 2008 global financial meltdown. Russia, too, has seen many consumer finance companies suffer due to crash in commodity prices.
NBFCs defend their due diligence norms and say they run their portfolios past credit bureaus to see if the borrowers' credit profile has changed after they took the loans.
Arun Ramamurthy, Co-Founder, Credit Sudhaar, who earlier worked with Deutsche Bank, says any explosive growth comes with excesses. "The doubling of growth numbers is not sustainable, as we have seen in the e-commerce space. I think the next crisis will be in retail lending," he says.