Retail-led credit growth faces headwinds: RBI's financial stability report

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Lenders turned big time to the retail segment — individuals, households, and small businesses — to expand loan books as wholesale demand dried up due to sluggish investment and excess capacity.

But, the retail-led credit growth model in India is beginning to face headwinds due to two factors, according to the Financial Stability Report (FSR).

The first is an increase in delinquencies in the consumer finance portfolio. The second factor is a slowdown in the new credit segment, a key driver of consumer credit growth in the pre-pandemic period.

According to historical data, non-performing assets in emerging markets typically peak six to eight quarters after the onset of a severe recession.

Impairment in consumer credit, measured in terms of the proportion of the portfolio at 90 days past due or beyond, shows signs of stabilization after the pandemic. But this stabilization is at a fairly higher level for public sector banks, relative to other lender categories.

Delinquency levels in terms of product types point to a general deterioration across product category levels in September 2021 relative to September 2020, with the credit card segment being the only exception.

General lending standards in the industry have been tightened across lender category levels, leading to a drop in approval rates as also moderation in the growth of balances, it added.