Consumer credit demand rebounds after note ban

The demand for consumer loans in India seems to be returning as the adverse effect of demonetisation on the confidence of households wanes.

Demand growth was flat in November 2016 over the same month a year before but moved up 15 per cent in January, according to TransUnion CIBIL, a leading credit information agency. The financial system had seen unprecedented consumer credit growth over the earlier four years, including loans for vehicles and homes, cards and other credit products. The announcement on demonetisation created short-term disruption in this, says the agency.

However, new data indicate a strong rebound in demand for loans from individuals. A promising indicator for the stability and growth prospects of the credit sector and the economy overall, said Amrita Mitra, vice-president at TransUnion CIBIL.

Public sector bank (PSB) executives said loan performance had remained stable after demonetisation but that it would take five to six months for credit demand to become normal.

While loan demand shows signs of an uptrend, the pace of credit disbursal remains a concern. Aggregate credit granted fell 12 per cent in November 2016 from a year before; December loan originations were similarly down 13 per cent. PSBs showed the largest decrease in originations among major lender types, down by a little over 50 per cent in December 2016, compared to December 2015.

A notable exception to the origination drop was in credit cards, where there was a 10 per cent year-on-year increase in November. The drive on digital payments, one of the objectives of demonetisation, has shown initial positive results. Mitra said the drop in originations was not a consumer demand issue but one of lender supply. The pace of credit expansion had slowed even before the demonetisation decision in early November. Banks turned cautious after the high pace of growth in 2015-16, to contain defaults. According to the Reserve Bank of India data, retail (to individuals) credit by banks grew 12.9 per cent in the 12 months till January 2017, down from 18.1 per cent in the preceding 12 months till January 2016. The loan book was Rs 15,23,600 crore.

In the light of generally stable consumer credit performance after demonetisation, this lender retrenchment might be unwarranted. Analysis of the delinquency trends (90 days or more past dues) in December 2016, compared to December 2015, shows relatively stable performance overall, with improvements in automobile loans and credit card delinquency rates offsetting some deterioration in two-wheeler and housing loans. “There are early signs of relatively stable delinquencies. Lenders might have curtailed origination activity in anticipation of a significant increase here but to date, we have not experienced that deterioration. The key challenge for lenders is how to prudently capitalise on this opportunity to meet higher consumer credit demand,” Mitra added.