About 20% of all active credit-card customers in India are in the highest category of creditworthiness, according to TransUnion Cibil.<\/span><\/figure>\n<\/div>\nAny financing that\u2019s secured by collateral \u2014 steel mills, textile factories, power plants, roads\u00a0or land \u2014 is in trouble in India. A multiyear investment slowdown has decimated credit quality. Now, the problem is spreading. The near-recession\u00a0in the consumer economy means\u00a0unsecured lending could be the next domino to fall.<\/p>\n
With business collateral losing its sheen, India\u2019s top three private-sector banks have been expanding their credit card and personal loan business at 30%-plus rates, double the pace of growth in their corporate loan book. They can\u2019t keep up\u00a0for long. If\u00a0they try, they would only be storing\u00a0trouble\u00a0for the future.<\/p>\n
Why? For one thing, the quality of the next borrower is suspect. About 20% of all active credit-card customers in India are in the highest category of creditworthiness, according to TransUnion Cibil, which assigns scores. But among those who signed up last year, only 3% belonged to this least risky group, an analysis by Sanford C. Bernstein & Co. shows. The next person to apply for and get a credit card in India is more likely to be subprime.<\/p>\n
A surge in lower-quality\u00a0customers would raise\u00a0credit costs. It will be a double whammy\u00a0when banks have to provide for bad loans after paying for costlier term deposits. And that\u2019s linked to the consumption slowdown, because of what Bernstein analyst Gautam Chhugani calls the sheer \u201cexhaustion of household savings in the large metropolitan cities.\u201d<\/p>\n
This is a true\u00a0showstopper. Unlike their state-run cousins, HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. are more city-centered lenders. Right up to March 2016, the trio enjoyed steady annual savings deposit growth in the range of 17%-18%. Then, in November that year, came the\u00a0draconian Indian currency note ban. Their deposits swelled as people returned the 86% of the currency that was no longer legal tender.<\/strong><\/p>\nBut the top three banks\u2019 savings\u00a0deposit\u00a0growth\u00a0has since slipped\u00a0to 10%, while\u00a0for all lenders\u00a0the figure has plunged\u00a0to as low as 6% in metropolitan areas. Urban Indian consumers have reached\u00a0into their nest eggs\u00a0to battle sudden job losses, poor pay increases and a\u00a0$15 billion wealth shock\u00a0from apartments that they\u2019ve paid for but were never built because\u00a0developers ran out of money.<\/p>\n
Having lowered their savings rate to 22% of disposable income last year from 29% in 2012,\u00a0consumers are shopped out, as evidenced by the 41%\u00a0fall in August car sales,\u00a0the biggest drop on record. Not only is the\u00a0slump bad news for vehicle finance, but the depressed consumer sentiment is a Catch-22 for unsecured lending.<\/p>\n
As Bernstein analysts explain, 35% of HDFC Bank\u2019s\u00a0earnings growth comes from credit cards and personal loans. If the\u00a0bank\u00a0goes down to smaller cities and towns in search of the next borrower, it will be competing\u00a0for the typical micro-finance customer. And this type of subprime borrower\u00a0could already be in significant debt. Bandhan Bank Ltd.,\u00a0a small-loans specialist, has of late been making advances with an\u00a0average ticket size of 64,000 rupees, ($890)\u00a0compared with under 40,000 rupees on its outstanding micro loans.<\/p>\n
Not wanting to go down this path will present the other challenge \u2014\u00a0of not being able to earn a decent margin on costlier term deposits. Either way, the prognosis for bank shareholders isn\u2019t bright. A bigger worry is the macroeconomic impact of big private-sector banks stepping off the\u00a0gas. Stricter\u00a0standards could\u00a0worsen India\u2019s\u00a0consumption slowdown by making unsecured credit harder\u00a0to come by.<\/p>\n
Sooner or later, stretched household finances will\u00a0affect mortgage demand. That won\u2019t\u00a0help with India\u2019s\u00a0plan to get buyers back into the real estate market with deep interest-rate cuts.<\/p>\n
Mind, there\u2019s no sign\u00a0of a subprime crisis. At least, not yet. But prime borrowers are few\u00a0in a country\u00a0where just\u00a027%\u00a0of the women\u00a0aged above 30\u00a0are in the workforce, unemployment is at a 45-year high of 6.1%, barely\u00a023% of workers earn a\u00a0regular\u00a0wage, and\u00a0only three out of the 10 who enjoy\u00a0a steady salary have proper\u00a0job contracts.<\/p>\n
Unsecured\u00a0loans can only offer banks a temporary shelter during\u00a0a downturn in collateralized\u00a0credit. That\u00a0protection doesn\u2019t last\u00a0long.<\/p>\n
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