CashNews.co
Also Read: Credit card dues and defaulters on the rise
“Young millennials are using the entire limit and directly defaulting and turning into an NPA without even revolving the loan,” Suresh Ganapathy, research analyst with Macquarie, has said. He noted that net credit losses in credit cards are running at closer to 5-6%, with SBI Cards reporting 7.5% net credit losses last quarter.
“Most of the payments transactions on Amazons of the world are through credit cards. Now we have BNPL, which is catching up. Also, there are EMI schemes which are popular among card users. All this is allowing card users to buy more and repay through instalments,” V Balasubramanian, CEO of Financial Software and Systems, a payments technology provider, had told ET in January. “This is typical of any country which is moving from a savings economy to a credit or a consumption economy. The younger generation owns a bigger pie of the credit card ownership as well as spends. They are active buyers on ecommerce platforms.”
A credit card borrower’s default journey
Rising usage of digital payment infrastructure, improved internet and payments services, and popularity of e-commerce have created a favourable platform for the growth of the card industry. The lure of paying in EMIs for purchasing goods online drags young users into defaults. Card companies offer attractive deals for big-ticket purchases on credit cards in EMIs. This can lead to impulsive buying which later turns into a burden.”The borrower’s default journey begins with making a large purchase with the idea that they will repay it in instalments. But this outstanding gets amortised at a rate as high as 48% annually, and the borrower reaches a stage where he can make only the minimum payment,” Ritesh Srivastava, founder and CEO at debt relief platform Freed, told TOI. “What we have seen is that the borrower, to make the minimum card payment, gets into loan-stacking by taking small-ticket personal loans,” he added.Also Read: India’s ‘swipe-up’ generation set to swipe right on festive deals
According to Srivastava, credit scores do not act as guardrails because borrowers are not defaulters as long as minimum dues are being paid. Srivastava, who was involved with a debt relief business in the US, said that the card companies are operating the same strategies as the US to scale up. Big-ticket sales are being offered at lower prices when purchased by credit cards on EMI to get big-ticket consumers. According to a senior executive with a private bank, the EMI option provides credit at much lower rates than the roll-over rate. “There is no wilful maxing out of cards in order to default like during the global financial crisis. The delinquencies are largely in cards that are sourced from the open market because direct selling agents are incentivised to push cards,” he said.
RBI’s nudge is working
Retail loans have been propelling Indian banking growth for two decades, by expanding faster than corporate loans. While due to granularity this reduces the risk of high bad loans, it could lead to a build-up of risk if not monitored closely.
Unsecured tiny personal loans, mostly below Rs 10,000, had been selling like hot cakes as overzealous banks pushed them hard. While it meant brisk business for banks, they also came with risk. The Reserve Bank of India (RBI) took cognisance of the trend last year, flagging heightened risks in the unsecured segment and asking lenders to exercise caution while extending personal loans for consumption purposes. The RBI found that credit growth in unsecured loans has been an outlier at about 23 per cent as compared with an average of 12-14 percent of credit growth in the country. It has even outpaced the overall bank credit growth of about 15 per cent seen over the last year.
The Central bank increased risk weights on unsecured consumer credit and bank credit to NBFCs in November last year, directing banks to set aside more capital and establish board-monitored processes on such loans to prevent risk escalation in the financial system.
The RBI’s action is showing results. As per Macquarie’s unsecured retail index which includes personal loans, credit cards, education loans etc – post RBI measures in November 2023, credit growth in these segments has come down to 15%.
India’s retail credit growth experienced a notable slowdown in the quarter ending June 2024, primarily due to a significant decline in home loan originations, according to the latest TransUnion CIBIL Credit Market Indicator (CMI) report. Remarkably, personal loans saw the steepest decline in growth, plunging from 36% in June 2023 to a mere 3% in June 2024. The credit card segment faced even greater pressure, with a 30% year-on-year drop in originations, marking a stark shift from 8% growth in 2023. This contraction in credit card originations could be attributed to lenders adopting a more cautious stance towards unsecured loans following the RBI’s guidance to slow down this segment.
“Our timely action resulted in slowing down growth of unsecured loans. If left unattended, vulnerabilities on unsecured loans could have become a bigger problem.” RBI Governor Shaktikanta Das had said in June.
Early this month, the RBI rejected Canara Bank’s proposal to set up a credit card subsidiary, which the government-owned lender thought would give fillip to its fledgling card business.
Wary banks are pushing secured credit cards
At a time when the Indian credit card industry is showing signs of a slowdown after a period of unbridled growth, there is a renewed push towards distribution of secured credit cards, or those backed by term deposits, ET reported in July. While this product has always existed, it was not aggressively pushed by mainstream banks. Typically, business professionals, startup founders and people without fixed salaries get these cards against fixed deposits they park with the bank.
That has been changing over the last year or so. Small lenders and small finance banks have taken the initial lead to issue secured credit cards, ET reported. Now large lenders like Axis Bank and HDFC Bank are also looking to scale up issuance.
Self-monitoring makes you careful
Borrowers in the non-metro regions including rural, urban and semi urban areas are increasingly becoming more credit conscious than their metro counterparts. Consumers monitoring their borrowings have risen by 57 percent in 2023-24 in the non-metro regions compared to 33 percent growth in metro regions according to credit bureau Transunion Cibil.
Interestingly, personal loan applications decreased after self-monitoring. The report highlighted that self-monitoring consumers tend to apply for credit opportunities after reviewing their credit history. Post-monitoring, the ownership of two-wheeler loans grew by 50%, consumer durable loans by 41%, gold loans grew by 38% and credit cards grew by 14%, but personal loans decreased by 16%.
Significantly, young borrowers are becoming more credit disciplined and conscious according to the report. The number of Gen Z borrowers, those born after 1996, tracking their credit scores grew one-and-a-half times in FY23-24. Ninety one percent of new credit users were Millennials, borrowers born between 1981 and 1996, and Gen Z in FY23-24.
(WIth inputs from TOI)