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We hosted a call with Mr. Kaushik Mehta, Founder and CEO of RULoans Distributions, one of the largest DSAs, to discuss the recent business trends in retail loans and to gauge the impact of recent localized lockdown, if any.

* Retail credit appetite remains healthy, but lenders turning cautious could hurt business in the near term: As per Mr. Mehta, credit demand accelerated last year in secured segments like home/car loans once lockdowns were lifted, with banks at the forefront armed with lower rates and renewed aggression to capture the market share. The trend accelerated in Jan-Mar’21, which reflected in the DSA clocking nearly Rs38bn of business with nearly 60-65% in mortgages. Among the lenders, HDFCB, ICICI, Axis, BAF, IDFC First and Kotak showed aggressive strides, but IIB and RBL remained fence sitters possibly due to their own asset quality issues. However, the first fortnight of Apr’21 has been weak in terms of business (already down 20%) due to lower working days and onset of an aggressive second wave of Covid-19 infections. With stricter lockdowns now in place, Mr. Mehta expects business should be down 40% by month-end, but will still be better than last year as lockdowns are largely localized without much impact on the salaried class. He believes that the credit appetite is likely to remain intact, but lenders may turn cautious, which could hurt growth in the near term. That said, growth will return once the lockdowns are eased, particularly in secured segments, and largely offset the lost business.

* Lenders could turn more risk-averse in unsecured segment, business loans: With the unlocking of the economy in H2FY21, growth momentum in unsecured loan products (mainly cards, Personal Loans and Business Loans) was expected to accelerate with the asset quality overhang easing out. However, lenders would once again turn cautious, particularly in PL and BL segments with the self-employed segment in pressure. As far as the SME business is concerned, it remains lackluster as lenders are shying away from new customers, while existing customers have already been extended the ECLGS benefit, leaving no further scope to lend to existing customers. That said, the asset quality risk in ECLGS is low as customer choice has been reasonably better by banks and as there is repayment moratorium as for now. Within the credit card space, SBI and ICICI have been able to bite into the market share of HDFCB as the latter’s new card acquisition has been suspended by the RBI. Mr. Mehta believes that new credit card acquisition could be impacted a bit due to logistical issues, but underlying demand from customers remains strong with preference for digital payments and online purchase on the rise.

* Lenders focus is shifting back to manage delinquency vs. growth: Mr. Mehta believes that fresh lockdowns in credit major states like Maharashtra, Chhattisgarh, MP and Gujarat pose renewed asset quality risks. He said lenders’ focus during Jan-Mar’21 was largely on securing business, while bounce rates were easing and collection efficiency was gradually trending toward normalcy. However, lenders are seeking DSA help to secure collections, which was almost negligible in Jan-Mar’21, indicating the growing desperation in lenders. The risk of customers skipping payments or making part payments too is on rise.

* Our view: We believe that the underlying credit appetite remains strong and reflects rising consumerism, and thus the impact of the pandemic-induced lockdowns could be just a pause. That said, we believe near-term growth momentum and asset quality improvement could be at risk, hence we recommend to stay put with quality stocks. Among banks, we prefer large banks with strong shock absorption capacity and ability to capture the market share when normalcy returns. We prefer ICICI, HDFCB, SBI and Axis among large banks. Within NBFCs, we prefer HDFC and Chola.

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