retail loans: Slowdown may hit household debt servicing, retail asset quality: Moody’s

Retail loan asset quality could be hit as the general economic slowdown could hamper debt servicing capacity of the households which have borrowed significantly in the recent past, according to Global ratings firm Moody’s. The ratings firm expects asset quality across all retail segments to deteriorate.

Despite the economic slowdown in recent years, private consumption has generally held up. The expansion in retail credit is likely to have played a key role in sustaining consumption growth in recent years, as banks and NBFIs turned towards retail customers, Moody’s said.

The ratio of retail credit to private consumption expenditure, a proxy for credit intensity of household consumption, has been rising. “ This increased reliance on credit has taken place alongside a decline in the household savings rate particularly in physical assets (such as gold or real estate)” said the ratings firm. However, the liquidity constraints of some non-bank finance companies -NBFCs will likely weigh on credit availability for retail purchases.

Moody’s also noted that risks have been building in the retail segment, which have been growing at a fast pace over the last few years. Within retail, the fastest-growing segments between FY12 and FY18 have been the riskier, higher-yielding areas such as non-salaried housing, loans against property, credit cards and personal loans.

‘‘The impact on individual banks’ credit profiles will depend upon the degree of retail exposure in their overall loan books” Moody’s said “Private sector banks have a much larger exposure to retail loans than do public sector banks and may be more at risk”

A weakening in household debt metrics has accompanied strong loan growth. Wage increases have been slower than retail loan growth. “The falling household savings rate also points to a weakening of household balance sheets” Moody’s said. The deceleration in economic growth in the last few quarters will further hurt household debt servicing capacity. The sharp slowdown in credit supply from finance companies will further hurt asset quality. Finance companies are large providers of retail credit. A significant number of these companies face tight funding conditions as they also have exposure to real estate and other wholesale loans. This is weakening their ability to expand their retail lending businesses. Tightening credit conditions will particularly hurt asset quality in the SME/loans against property segment, where refinancing is a key feature.