From Cash Cow to Achilles Heel: Transforming the Consumer Lending Industry

Stress in the consumer lending industry, which was once a cash cow for banks and non-bank financial services, only appears to be intensifying, as statements and updates from these lenders suggest. A critical highlight in RBL Bank’s media statement regarding its business updates relates to its credit card segment. “Acquisitions stopped during the lockdown; only digital origin cards are reserved,” the private bank said.

He added that credit card spending had fallen by 40% during the lockdown, with the bank expecting a slight increase in the cost of credit in March. In a call hosted by UBS, HDFC Bank also said card swipes declined in March.

All of this points to the stress brewing in the consumer sector (credit cards and personal loans, mostly unsecured) of banks and lenders. Bajaj Finance’s weak commentary added fuel to the fire, dashing hopes of a near-term demand recovery.

But how demanding can pain be?

UBS analysts expect retail loan growth and collections to be hit due to social distancing and lower discretionary spending. “Banks exposed to the above will be most affected,” the brokerage adds.

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While consumer credit is the mainstay of Bajaj Finance and Capital First (now IDFC First Bank), banks were late to the party.

Growing weakness in traditional pockets of personal lending, such as home loans and auto loans, prompted banks to diversify into consumer lending.

Among banks, HDFC Bank leads the segment, followed closely by ICICI Bank and Axis Bank. RBL Bank, too – with its association with Bajaj Finance for credit cards – regularly captured the segment.

Rising income levels of consumers and their ambitious needs were the premise for lenders to expand this business. Also, since lenders were targeting their existing customers, it didn’t matter if they were unsecured loans.

However, times have changed and banks are tightening their purses. As some industries like airlines and food delivery face job losses and pay cuts, the consumer lending segment suddenly appears the most vulnerable.

Kotak Institutional Equities analysts note that as of March 20, 2020, unsecured retail credit and consumer loan applications fell 10-29% week-over-week, indicating a sharp decline in the demand.

“While it can be argued that there will be pent-up demand for discretionary spending which, post-lockdown and demand disruption, will be temporary, significant wage growth over the next 1-2 years still seems unlikely. likely,” an analyst at a national brokerage said.

Therefore, even if demand picks up, the overspending layer seen before the downturn may not return. “We won’t find people who upgrade their cell phones every six months or take out a loan for a lavish wedding or vacation,” the analyst says.

In short, the belief, even among bankers, is that the practice of relying on loans to improve one’s lifestyle will fade into the background.

While some of the pain may be captured in private lenders’ fourth quarter results, analysts say results from the June and September quarters will be key in assessing the quality of these lenders’ assets.

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