MUMBAI:
Newly-released research from TransUnion CIBIL’s Industry Insights Report found that demand for retail (i) credit products has steadily increased in recent months following the initial shock from the COVID-19 pandemic earlier this year.
Although year-on-year (YoY) growth across key metrics has yet to reach pre-pandemic levels, there has been positive momentum for credit demand. In November 2020, retail credit demand (as measured by inquiry volumes) was back to 93% of the levels observed in November 2019, and was significantly up from the low levels observed during the early months of the pandemic.
Abhay Kelkar, vice president of research and consulting for TransUnion CIBIL, explains: “The global economy is still suffering from the impact of the pandemic. As businesses and consumers adapt to the challenging situation, we see positive momentum in demand for credit since the initial lockdown earlier in the year. It is encouraging to see the renewed demand for credit, as that signals that consumer confidence and the willingness to borrow to fund larger-ticket purchases are on the rise.”
The rebound in inquiry volumes has varied significantly across lending categories. Reduced interest rates, attractive payment schemes and discounts offered by developers contributed to an improvement in demand for home loans. Inquiry volumes were up 9.1% YoY in November 2020. Conversely, personal loan inquiry volumes fell by -43.1% YoY as risk appetite for lenders declined. Whereas in pre-COVID times FinTechs and non-banking financial companies (NBFCs) had driven much of the growth in this category, NBFCs saw a decline of -69.7% YoY in November 2020 as they pulled back from making personal loans available to high risk borrowers. Inquiry volumes for FinTechs also declined by -10.2% YoY during the same time period.
Supply of new credit declined
Originations (as measured by new account openings) fell across all major retail credit categories YoYin August 2020. Originations are a function of both consumer demand and lenders’ capacity and willingness to advance credit (supply). The latest CIME (Centre for Monitoring Indian Economy) statistics show that money supply YoY growth rate (a measure of liquidity in the market) has been greater from a YoY perspective (Nov 2020: 12.5%, Nov 2019: 9.8%). This implies that the significant fall in origination volumes across all major retail credit categories was driven by a decline in consumer demand over that period as well as lender risk appetite. Approval rates also support this conclusion, with a fall across all major lending categories YoY in August 2020.
Kelkar continued: “When lockdown restrictions started to ease, there was a marked change in lender risk strategies, with some returning to the market far quicker than others. Public sector banks were amongst the first and earliest to see a resurgence in demand. Equally, lender appetite for risk has changed, with some providers moving away from extending new credit completely.”
Delinquencies showed mixed results
As with most major credit markets around the world, retail credit products have generally experienced an increase in serious delinquencies (defined as balances 90 days or more past due). In India, the delinquency picture is complicated and will take time to emerge due to the lagged effect of financial conditions, relief programs supported by lenders, and shifts in the payment priorities of consumers. Amongst major retail credit products, credit card and loan against property (LAP) recorded the largest increase in balance-level serious delinquency rates YoY in August 2020 – up 51 and 34 basis points (bps), respectively.
Credit cards delinquency rates reflected the wider economic slowdown, salary cuts and job losses caused by the pandemic. Further, credit cards often have a lower payment priority, with consumers choosing to pay other credit accounts first.
For LAP, a product generally used by small businesses as working capital finance, delinquencies had already been on the rise prior to COVID-19. The pandemic and resultant lockdown has impacted the cash flows of small businesses further, and consequently their ability to service debts has diminished. Conversely, auto loans saw an improvement in delinquency rates YoY in August 2020, with a reduction of 23 bps to 2.91%. Consumers seem to be prioritising auto loan payments to preserve the utility that personal transport provides. Many consumers are worried about personal health while using public transport due to COVID-19. Personal loans also showed a minimal improvement of one bps, driven by a drastic reduction in lender risk appetite and new account originations both pre- COVID and as the pandemic emerged.
Kelkar observed: “With financial relief programs continuing to help large numbers of Indian consumers, we don’t know the full extent of the impact on delinquencies yet. Although there may be a lag in the true volume of borrowers who fall delinquent, many lenders are hopeful that the impact will be less severe than may have been initially expected with the support from government and lender relief programs.”
Uncertain times ahead
With sentiment buoyed in recent weeks with the announcements of various successful vaccine trials, the world economic outlook does appear to be improving. With India’s economic growth expected to rebound strongly in 2021, many leading indicators for consumers and lenders are positive. Kelkar concludes: “The impact of COVID-19 will continue to modify consumer and lender strategies and appetite for risk. The shape of the recovery in retail credit markets will be very much influenced by the ability to contain the spread of the pandemic and the successful deployment of vaccines at scale. Much of the global economy is changing as the impact of subsequent waves of infection continues to be felt, and India is no exception. Measuring and monitoring key metrics, leveraging enhanced data, and applying advanced analytics techniques to develop business strategies are all critical considerations for lenders during these unprecedented times. Understanding consumer needs is the key to actively managing risk and providing the support that customers need.”
