More people availing loans even as ticket sizes grow smaller: Satish Pillai, CIBIL
- Largest growth segments on unsecured side in semi urban and rural India.
- Over last last 6-8 years, India’s revival from a retail credit standpoint has started.
- There is fear of contamination effect from SME delinquencies.
What are the primary cues from various lending segments both in value as well as volume terms based on the analysis of the latest quarterly data?
It is important to separate unsecured lending which is loans to finance and consumer durable goods, personal loans, those paid in the private space NBFCs, fintech and separate that from auto, two-wheeler and home loans and LAP on the secured side. But the differences have been quite dramatic. On the unsecured side, the growth has still been very strong. We still see strong double digit growth in personal loans, consumer durable loans. What is interesting is the new originations or new people coming in, looking for loans. It is growing at a very high rate over 30%.
From an amount standpoint, the ticket sizes are getting lower in India. That is a trend that we have been seeing for the last three to four years. Although that segment is growing, there is high demand for it, It is loan for consumption that includes credit cards as well. Balances in cards are up year over year for this quarter and that trend has always been increasing, the revolve rate cards have been pretty steady too.
But the unsecured story has been strong this quarter again and delinquencies are still low. What is different though is the experience on the secured side. We all know exactly what happened on the auto side. The demand shortage or oversupply or whatever driving forces we have seen, the pick up on the auto side has been significantly lower than before.
The impact of the NBFC crisis actually has a spill-over effect. All in all, if you look at it from an amount standpoint, the lending amount over the last quarter has probably been lower. India’s lending landscape has changed dramatically. It will be more appropriate to start looking at the number of loans given, the numbers of new originations that has a cost impact to banks as well. But it also talks truly. In terms of inclusion, there are more people coming in and getting access to credit faster and cheaper. So for India, the dimension to look at is not just in terms of percentage of credit offtake, but also the number of people getting credit, and that has been rising.
But with credit access ease penetrating the domestic population and around about 15% of the total being first-time users to credit, do you really see a risk of delinquencies coming up?
Traditional definition of financial inclusion talks to people who do not have credit. But here is the interesting fact. About 22-23 million people are applying for credit every month and only about 15% have never availed or asked for credit before. So, 22 million people are getting access to credit every month but the bulk of lending is still to people who already have been included as it were. But it is still inclusion in the sense that you are actually giving them credit in a very different fashion than those Rs 3 lakh, 3-year tenure type of personal loans. Even Rs 10,000 loans are available, It is almost like getting money for any purpose and then paying it back. The dimensions have changed.
Contamination is spread through issues that we see on the MSME side. We get led out of recessions and led into recessions by the small businesses.
Across the board, delinquencies on unsecured loans are still very low. We track two things – we track very early delinquencies as well as late delinquencies that show up in P&L. They might look good but there is a cost of collection that a lot of banks have to go through as we acquire more and more customers. Every customer is a finite cost in terms of collections. The amount might be small, but if you spend the same or use the same methodology to collect, your cost is always going to go up.
What we actually see is delinquencies on the unsecured side are still very stable. Consumer durable loans, personal loans. NBFC delinquency rates have always been highest in the private side. The private lenders and public sector banks are tethered by CASA accounts that they are cross selling to. NBFCs tend to be a lot more open source.
By definition, you expect it to be higher. The question is more around stability and the situation continues to be stable. Of course, the two parts that we actually look at is a)the cost of acquisition and whether you have the scale to be able to reduce the cost of acquisition as you grow your books. Larger players are better placed for that.
b)The second piece is around collections. What is your collection effectiveness? What is the collection cost that you pay to ensure that your NPAs are lower? Again the larger scale enterprises probably have better scale and fintech and all will have to go through the growth to get to that point.
Will the next wave of growth come from tier-1 urbanised areas? Do you see growth being fuelled by smaller towns and cities and perhaps rural credit growth. Any specific geographies or data which is looking interesting?
In the last 3-4 years, we have seen the emphasis on financing consumer durables. So, smaller ticket size fintech lending for phones and TVs has been going a lot more towards semi urban and rural areas. So the largest growth segments across everything, every segment on the unsecured side is semi urban and rural.
In fact, if you look at credit cards as well, it is a great example because one extreme which is considered very urban now -- 80% of the balances are all urban. It is a large part of it but the fastest growing segment has actually been semi urban and rural. Those are the segments where credit card companies are actually reaching out and cross selling to the CASA base or in partnerships with banks to figure out how to get cards to the un-carded. The growth has been diverse. From a geography standpoint, it is no longer concentrated in large metros.
In fact, that has not been true over the last 6-8 years when India’s revival from a retail credit standpoint started. With gold loans being secured, it started going to much deeper geographies and that trend has continued. The growth has been fuelled a lot more by the semi urban and rural setting in those areas where we have actually seen strong-strong growth across unsecured and secured as well.
Where do you perceive the largest risk to the current lending sphere?
There are a couple of risks. First, the risk is from within. Are you growing too fast? Are you not able to manage the book? It depends on the cost of acquisition and collection costs and we see the larger players doing much better. The fintech companies are growing. They are driving a lot of growth in the economy. But the big question is how do they manage this from a profitability standpoint? Will they be effectively be able to manage the cost and also been able to manage collections effectively.
That kind of pressure from within has a balance sheet impact and therefore there is a cost of capital crunch and some lenders might actually slow down because of that. We have not seen that to a large extent.
The influence from outside is a lot more material but because the growth has been on lower ticket size. The traditional definition of leverage and how much money you make and therefore how much debt you have, might not be the right measure to look at unrevealed risk. So we look at things like velocity, how many times you are getting loans in the last three months etc. They might be much smaller ticket size loans, they may be Rs 7,000-10,000 loans and they might all be 0% intererst loans. You might not even think of it as loan but it is adding up in terms of number of loans you are servicing. There is a cost for the banks or the NBFCs to be able to collect. These are the stresses that are there from within.
I think all banks and NBFCs are very paranoid about the slope of leverage and the speed of access to credit. I am comfortable in terms of the risk awareness of the industry there. The second piece is the impact from without, which is the macroeconomic impact. The liquidity crisis from the NBFC standpoint has definitely resulted in less credit being granted by NBFCs. Especially, the smaller NBFCs have been impacted. We have seen the same thing on the HFC side. A major impact has actually been seen.
Overall it looks fine but the risk that I worry about is contamination effect. To give you an example, when auto was actually slowing down, the delinquencies were being managed very well. But the challenge will be in the SME side. SMEs in the auto cluster are actually seeing stress . They are generally good risk customers from our score standpoint, meaning they are very, very low risk. But we see them migrating and that actually happens when the real economy starts slowing down.
If there are supply side issues which are caused by lack of demand or even by oversupply. you would actually see the MSME slowing down. When they slow down in clusters and areas, even the retail lending at some point will start seeing contamination effect. The scale of Indian lending is much larger than 10 years ago but those are the things that I worry about.
Contamination is spread through issues that we see on the MSME side. We get led out of recessions and led into recessions by the small businesses. That is a key thing to look at. Not just the businesses, but the effect that they have because there are individuals, consumers associated with any area or any company and if their payback in terms of consumer durable loans, personal loans starts deteriorating, then there will be a more widespread ripple effect from slowdown.
Where would you place India in terms of credit access? Are we where China was a decade or more ago?
China is a good country to actually compare ourselves with , to start looking at where the runway of growth is. But the experience is slightly different in India. What type of lending actually happens and how much of it is point of sale is somewhat similar, but also different just because the experiences from India standpoint are very different.
The lending communities is very different but the similarities are more around what you need to unlock in terms of visibility of credit. The runway from an India standpoint is close to 600 million people in India who have got access to credit at some point or the other. 10-20 years ago, they got a home loan and nothing else. There was probably exclusion of credit in the sense that they might not get the money they wanted. Remember, only 50% of people when they apply for credit get approved; the others get declined.
We talk about the banking side being profitable because the NPAs are lower, but there are a lot of people getting declined for credit now for whatever reason. So, there is an element of unlocking the credit demand for those individuals based on their need. Hardly ever a person has a need for a loan; they actually have a need for an end purpose -- a phone, you need a home, a car.
The big runway of Indian growth is going to be to unlock product construct of the lending side. It has already happened. For me, the fintech revolution in India is a lot more about how they are looking at the product construct more attuned to the needs of the consumers.
In terms of pure math, there are probably about 200 to 250 million individuals to unlock; people who can be exposed to organised lending. Part of this is going to come down to as I said around the product that actually matter. Why do women borrow in microfinance groups and only 10% of them migrate into banking? That is because the product construct is a lot more attuned to them. They would rather borrow in groups, smaller amounts, smaller tenures. How do you figure out that behaviour or bias and that gives us possibilities from a run base standpoint.
I think there is a huge runaway from that perspective probably similar to China in terms of lending and payment becoming very blurred. That is the evolution that we actually see where we have to do a lot of work to make sure that there is data available for us to take faster decisions and have a better understanding of consumer behaviour is one.
While financials form a significant chunk of the market cap given that majority of Indians are yet to enter the formal credit system, how large an opportunity awaits the Indian financial companies?
As I said, there is a runway to growth for all these kind of lenders -- the largest to the smallest lenders. It is not as if Indian opportunities have been tapped out. You have to be careful how you do it as macroeconomic factors play in line to allow us to grow. But in terms of new origination, rather than just the amount getting a little muddy, if you see 12 to 18% growth in credit, you think it is lukewarm. A number of new originations are growing at 30-35%. That means that there is a whole lot of activity trying to make sure that you can reach out to consumers.
The size will be much much smaller than before but probably is the right way to get to individuals. The debt burden then is much lower and there is a chance to sustain this run a whole lot longer. But all this depends on effective management of cost of acquisition and collection cost and of course the macroeconomic piece. If the small businesses undergo any stress, at some point there might be a contamination effect and we have to keep a very careful eye not just in terms of who you lend to but where you lend to. Sustainability requires a whole lot of circular reference around the small businesses as well as consumers. There is a great story over the next 5-10 years for this market.