Retail trumps corporate lending as small-ticket loans see fourfold jump in past two years

• The effects of the RBI crackdown on easy personal loans is yet to be seen.
  
• Despite a more than 25% decrease in acceptance rates, credit card balances have consistently increased.
  
• Gold loans stand out within the retail lending segment by providing the most favourable acceptance rates.
  

Personal loans are on the rise. The month of December has seen the category in lending-verse amass outstanding balances of approximately ₹11 lakh crore, as per the Consumer Finance Overview by InCred Finance. Within the segment, the most rapid growth has been seen in small ticket personal loans (STPL), defined as loans under ₹25,000, witnessing a fourfold increase in volume over the past two years. Meanwhile, conventional personal loans, characterised by larger amounts and stricter underwriting criteria, have doubled in volume over the same period.

It is to be noteworthy that in November, earlier this year, RBI increased the risk weightage for unsecured personal loans, and the effect is expected to be seen gradually.

Retail lending trumps corporate lending

Interestingly, retail lending, directed at individuals rather than businesses, now holds the foremost position and exhibits the most rapid growth within the credit landscape. Retail lending stands at approximately ₹89 lakh crores (around $1.1 trillion), constituting 46% of the overall credit in the economy.

The report says that comparatively, corporate lending amounts to ₹74 lakh crores (about $0.9 trillion), securing the second largest segment. Retail balances are growing at a rate of 22% annually from a substantial base, outpacing the 17% growth of overall credit balances and the 14% growth of corporate balances.

Credit cards remain fastest growing retail lending category, despite decreased acceptance rates

The fastest growing sector in retail lending remains credit cards. Despite a more than 25% decrease in acceptance rates and an industry-wide tightening of credit policies for new-to-credit customers, credit card balances have consistently increased.

This appears to be a preemptive risk management step by lenders, as overall credit performance in the industry remains stable or even shows signs of improvement.

A report by Worldline, a payment and transaction services company, highlighted a surge in credit card transactions in H1 2023, reaching 1.550 billion, signifying a significant increase of 19.6% compared to H1 2022.

Loans for personal consumption drive retail lending

The outstanding balances for consumer finance have crossed ₹22 lakh crores (approx. USD 270 billion). Despite this high base, balances continue to grow at over 25% per annum across most product categories.


Source: InCred

Consumer durable loans see rapid growth

Consumer durable loans, akin to STPL loans in terms of loan amounts, are experiencing rapid growth. However, the distinction lies in their controlled use case, where disbursements are directly made to the merchant. The risk performance of these loans earmarked for consumer durables has shown stability.

Gold loans continue to shine

Gold loans also stand out within the retail lending segment by providing the most favourable acceptance rates, which is natural since it is a secured loan.

Banks have observed a rapid increase in their unsecured loan portfolios, raising concerns by the Reserve Bank of India (RBI). Responding to the RBI's worries about the growth of unsecured loans, specific banks are swiftly shifting their attention toward encouraging secured lending.

Among these, gold loans have emerged as an attractive financial product within the retail sector. This shift aims to mitigate risk by promoting lending backed by collateral rather than unsecured lending, aligning with the RBI's cautionary stance.