India could be heading towards a retail banking crisis. In FY2017/2018, retail loans amounted to around half (48.6 per cent, to be precise) of the loans given by banks (non-food credit). In 2013/2014, they accounted for just 17 per cent.
Currently, banks are not interested in lending to corporates. Defaults made by the industrial sector are responsible for nearly three-fourths of the overall bad loans plaguing the public sector banks. As a result, only 3.3 per cent of the total bank lending went to the industrial sector in 2017/2018.
Typically, when lending by banks to a specific sector rises dramatically within a short period, the quality of lending falls. With the fall in quality, defaults go up and bad loans rise. As on September 30, 2017, retail bad loans of banks amounted to 2.1 per cent of the outstanding retail loans. One of the key reasons why the overall retail bad loans continue to remain low is that the retail bad loans of the State Bank of India are very low at 1.33 per cent.
But the trouble with averages is that they hide more than they reveal. Even though the overall retail bad loans remain low, the same is not true for many public sector banks. Take a look at the table below.
As is clear from the table, the bad loans ratio in retail lending has risen between March 2014 and December 2017 in most cases. For UCO Bank, it has risen from 2.29 per cent to 7.73 per cent. In comparison, private banks are doing better although latest data is not available in all cases. It is similar to what ICICI Bank had to go through in the post-financial crisis years. The retail non-performing assets (NPAs) of the bank peaked at 9.84 per cent as on March 31, 2011.
The retail NPA story of the public sector banks is playing out quietly because everyone is busy focussing on the bad loans that have accumulated due to bank loans to industry. Although retail bad loans can never reach the level of bad industrial loans because recovery on default is much easier, such occurrences must be nipped in the bud before they become bigger than they currently are, and cost the government thousands of crores in bailouts again.