Hero Image

Pay cuts, job losses may lead to defaults on unsecured loans

Mumbai: Banks may see an increase in defaults on unsecured loans by individuals in the wake of the Covid-19 outbreak, which has led to salary cuts and even job losses, said analysts.

Loans to individuals, including personal, housing and vehicle loans, account for 28% of the total non-food credit at present, having grown 17% year on year.

That’s more than double the 7.3% growth in overall non-food credit, which is languishing at near 58-year lows.

Significantly, the contribution of individual loans to bank credit is twice the 14% it was at the time of the 2008 global financial crisis. Bank credit growth is much slower than the 18.1% in 2008. Defaults or slowdown in this segment could, therefore, derail the already anaemic credit growth, said analysts.

“There will be an impact no doubt. The question is to what extent. Almost all sectors have been hit because of this unprecedented crisis and jobs and salaries will be hit,” said Prakash Agarwal, head — financial institutions at India Ratings & Research. “Besides, banks and NBFCs will focus all their attention on collections after the moratorium is lifted, which means growth will be very negligible for the next three months at least.”

Banks have offered customers a moratorium on payment of loan instalments for three months starting March. However, customers will have to pay back additional interest on them. It is unclear as to how many customers have opted for it.

Analysts said that besides the threat of defaults banks will also have to deal with a sharp slowdown in consumption which will impact demand for credit cards, and personal and vehicle loans. “We may see either the outstanding amount on credit cards stay where it is or come down. People will try to curtail spending, and though it is too early to judge the impact, we expect the self-employed to bear a larger hit than the salaried class,” said Karthik Srinivasan, group head — financial sector ratings at Icra.

According to some analysts, India’s retail sector is still not leveraged to the extent that it will have a massive impact. “Unless you assume that Covid-19 will structurally alter the labour market and some will permanently become unemployed (which to my view is extreme), most will come back to the employment market, start working again and pay off the dues,” said Suresh Ganapathy, analyst at Macquarie Capital Securities.

READ ON APP