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Expanding Indian Consumer Credit Market Continues to be Led by Unsecured Lending

In Business
March 29, 2019

MUMBAI:
The newly-released TransUnion CIBIL CYQ4 2018 Industry Insights Report (IIR) shows the Indian consumer credit market continued to expand over the past year thanks to strong growth in the major unsecured lending categories of credit cards, personal loans and consumer durable loans. Between them, at a total balance level, these categories grew 31.3% in CYQ4 2018 compared to the same period the year before.

Secured lending categories—loans against property (LAP), auto loans and home loans—experienced more moderate total balance growth by comparison, expanding at the still-robust levels of 21.8%, 17.4% and 17.1%, respectively over the year ended CYQ4 2018. These healthy growth levels demonstrate that credit demand by Indian consumers remains strong, and that where possible lenders have continued to make credit available to borrowers to meet that demand.

“Consumer credit continues to be a key driver for the Indian economy. Although GDP growth has decelerated in recent quarters, the rate of overall consumer lending growth in India is still significantly higher than for most other major economies in the world,” said Yogendra Singh, Vice President of data science and analytics for TransUnion CIBIL. “As Indian lenders continue to increase in size and complexity, and look to expand the universe of consumers they can prudently extend credit to, they are evolving their underwriting capacity and sophistication accordingly with new data sources and analytic tools. This continued evolution in capabilities is increasingly important in maintaining retail lending growth as external factors like funding availability and the global economic outlook present potential headwinds.”

According to data from Oxford Economics, year-over-year GDP growth for India slowed to 6.6% in CYQ4 2018, compared to 7.0% in the third quarter and levels above 7% in the first half of 2018. Growth across all sectors belies moderating lender appetite All major consumer lending products experienced double-digit percentage growth in the total number of accounts in the 4 th quarter. Encouragingly, the largest product segment by number of accounts—credit cards—also experienced one of the highest rates of growth, both in total balances and in the number of accounts (these measures increased 31.4% and 28.6%, respectively, on a YoY basis in CYQ4 2018). More than 25 million Indian consumers had credit cards at the end of 2018, an increase of nearly 50% compared to the end of 2016, which was immediately following the demonetization event of November 2016.

“The significant expansion in consumer credit card access over the past two years may be in part attributable to the experience of the demonetization event. Consumers see the importance and value of credit cards in facilitating spending as well as in providing access to liquidity and borrowing power,” continued Singh.

A similar story—strong account and balance growth—was also true for all the smaller ticket-size loans including personal loans, consumer durable loans and two-wheeler loans. This growth across a range of account types indicates that the trends of strong consumer credit demand and access to credit continued in the most recent quarter.

“It is clear there is still significant demand for credit amongst Indian consumers, with enquiries increasing 40% year-on-year in CYQ4 2018. However, supply has not quite kept pace and approval rates have displayed a consistent declining trend from Q1 2017 onward. This effect is driven by an increasing percentage of non-prime, higher-risk consumers entering the credit marketplace, and shows lenders are actively managing their risk exposure and thus the profile of their overall portfolio,” said Singh.

Delinquencies stable across most lending categories
As accounts and balances have continued to grow across most retail lending products, consumers have generally continued to perform well on the products they hold. Delinquency rates remained relatively stable across most major consumer lending categories, with serious delinquency rates in CYQ4 2018 essentially flat YoY for credit card, home loans and personal loans. Auto loans showed a strong improvement over the past year, with the serious delinquency rate dropping 116 basis points (bp) to 2.75%. Serious delinquency rates are measured as the percentage of balances 90 or more days past due.

Loans against property (LAP) are the exception in the delinquency trend among major lending products, with serious delinquency rates increasing 53 bp YoY at the end of 2018, to 3.45%, continuing a trend of rising delinquency rates over the past two years. This is notable given that average balances per borrower tend to be much larger than for other lending products. However, the relatively small number of LAP accounts (1.9 million) compared to other product types means that the market exposure is limited to a smaller number of borrowers.

“The relative stability of overall delinquency rates in CYQ4 2018 is encouraging and suggests both that lenders are managing risk effectively, and that Indian consumers are keeping on top of their personal finances,” added Singh. “In previous reports we have commented on the upward trend in delinquencies for real estate related secured lending products like home loans and loans against property. This trend warrants continued analysis, especially as wider Indian and global economic growth moderates. At the same time, the flat delinquency rate for home loans over the past year is welcome news.”

Non-Bank Financial Companies’ lending growth expected to decelerate
In recent years, India has experienced a transformation of the consumer mindset from a savings- focused and debt-averse country to a more consumption-focused, leveraged economy. The rate of change has been, and still is, significant, and is due to multiple factors: changing demographics, urbanization, rising digitalization and the subsequent rise of e-commerce, improved access to retail lending, and increased exports. Accompanying this has also been a specific increase in the proportion of short-term, smaller-sized loans – often by Non-Bank Financial Company (NBFC) lenders, which include Housing Finance Companies (HFCs).

NBFC lending has been a significant driver of growth in the Indian consumer credit market, and in the last three years has accounted for between a third and a half of all new account openings (depending on the loan category). For LAP, NBFC lenders (including HFCs) accounted for an even greater proportion of new account openings in 2018, at 62%.

However, there are signs in the market that this rate of increase could decelerate as the non-bank lenders start to experience funding headwinds. This is evident from the enquiry data for home loans for CYQ4 2018. NBFC home loan enquiries exhibited a YoY drop of 7.9% – a significant contrast to the 9.3% increase shown by the Banks.

“Non-bank financial lenders have been a significant part of overall consumer lending growth in recent years but, as the global economy slows and the non-bank financial market matures, there are early signs this sector is starting to cool. Although we do expect continued growth amongst non-bank lenders, it is anticipated this could be at a more moderate rate. If this does happen, it will be interesting to see how this important part of the consumer credit markets adjusts, and to what extent banks step in to capture a greater share of the market. Given the rapid growth in the consumer credit market of the past several years, and the changes that lenders have undergone to respond to this growth, it would be expected that we would see continued shifts in the market going forward as lenders continue to adapt,” concluded Singh.