Based on the estimated retail bank credit cycle, the ongoing ‘retail-shift’ may not be permanent, but rather cyclical in nature and the credit growth may not continue to be high, according to an article in RBI’s latest monthly bulletin.

The Scheduled Commercial Banks’ (SCBs) expectations of retail credit demand moderated and loan terms and conditions expected to be tightened in Q3 (October-December):2024, RBI officials Sujeesh Kumar and Manjusha Senapati said in the article “Retail Credit Trends - A Snapshot”.

Retail bank credit has emerged as a major contributor to the overall bank credit growth, especially after the onset of the Covid pandemic.

The retail credit outstanding at the end of March 2023 was ₹40.85 lakh crore, more than double of that in March 2018.

The share of retail loans by SCBs in aggregate credit had increased from 24.8 per cent in March 2018 to 30.7 per cent in March 2022 and further to 32.1 per cent in March 2023 – the highest among the sectors.

Analysis

Empirical analysis using quarterly data for the period Q1:2008 to Q3:2022 suggests that the retail credit segment and its major constituents (housing and vehicle) are sensitive to interest rates as well as the asset quality of the banks’ loan portfolio, the officials said.

Housing loans are more sensitive to both interest rates and asset quality than vehicle loans for the same period, they added.

“So far, the relatively better asset quality in the sector may have fueled retail credit growth. Given the global headwinds and increasing uncertainties about monetary policy actions across geographies, it is necessary to assess trends in retail credit at a granular level on a continuous basis to evaluate the impact of financial sector developments on the overall economy,” Kumar and Senapati said.

The officials observed that the rise of retail loans did not occur in the post-Covid period suddenly.

They underscored that the share of industries was substituted by the retail segment during the last decade itself. Gradually, a ‘retail-shift’ was observed in terms of credit growth dynamics.

Bank-wise, there was reduced dispersion of retail credit growth in the post-Covid period, which implies that the credit growth was robust across the banks

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“The higher credit growth in the segment might be result of ‘herding behaviour’ displayed by banks in diverting loans from industry to retail segment…The better asset quality in the retail segment also appears to be contributing to banks’ increased focus on retail credit.

“However, this is not a risk-free segment and not a panacea for asset quality concerns in non-retail loans…,” the authors said.

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