Discretionary loans, cross-selling may reduce after moratorium

Larger challenge is to communicate to borrowers the difference between moratorium and waiver, say lenders

Earlier this month, when Rajeev Jain, managing director of Bajaj Finance, said the larger challenge ahead of the company was conveying to its customers that a moratorium on loans wasn’t a waiver, it sent signals of a probable change in the borrowers’ approach towards credit in tough times like these.

A few weeks later, HDFC Bank said the situation on the moratorium was an evolving one and it was too early to call out any specific trend.

“Our channel checks reveal that customers are opting for the moratorium even if they don’t require one and in many cases they believe banks will eventually waive their dues, or, in the case of penalties in credit card payments, they can complain and get them waived eventually,” said Suresh Ganapathy of Macquarie, based on his interaction with relationship managers across banks.

This is a really bad moral hazard getting created in the sector, which doesn’t bode well for asset quality,” he added.

Ganapathy has increased the credit cost for private banks from 1.3 per cent in FY21 to 2.5 per cent, owing to higher asset quality pressure in retail and small-business loans.

For public-sector banks, it has been increased from 2.3 per cent to 3 per cent for this financial year.

Experts in the credit rating industry and even banks say the change in customer behaviour may nudge them to take a second look at their lending strategy. For one, Sathya Kalyanasundaram, country head and managing director, Experian India, says ability to service loans may drop and, as a result, there could be a temporary dip in sourcing loans.

“The amount of sourcing will be different and an improvement in the quality of sourcing will depend on recovery in the overall market,” he said.

“Loans are expected to be taken more for sustenance than discretionary spending, in the short to medium term,” he added.

One should expect discretionary spends and demand for small-ticket personal loans to drop. Experts say even credit-card applications and balance growth may reduce. To some extent this was visible in the lending data for March, when personal loans and credit card balances grew by a slightly slower pace of 23 per cent. The growth rates of the two segments were upwards of 25 per cent in the past six months.

The more important question is whether lenders will continue to rely on cross-selling as a tool as in the past. The cross-selling ratio or percentage of loans extended to existing customers is 68-70 per cent in private banks and non-banking financial companies (NBFCS). To be fair, the rating profile of borrowers shouldn’t change if they opt for a moratorium and their credit bureau scores may remain unaffected. But, banks internally would have records of customers who opted for a moratorium despite having the ability to pay their dues and hence may be reluctant to lend to them like they did in the past.

“The cross-selling ratio is expected to be affected for larger loans like home loans and vehicle loans, in the short to medium term,” said Kalyanasundaram.

In short, banks are turning cautious on two important pillars of growth — retail, unsecured loans, and crossselling. Growth thus may take a backseat in the quarters to come.

Sumant Kathapalia, managing director and chief executive officer, Indusind Bank, refrained from giving growth projections and stated the bank was focusing more on protecting its balance sheet rather than growth. This said it all.