The COVID-19 crisis presents a set of conundrums for lenders in India on retail loans, wherein despite being flush with liquidity, they are likely to take a cautious stance on extending credit fearing a surge in asset quality issues, a report said on Thursday.
Despite demand for personal loans and credit cards, the lenders are likely to stay away from these segments due to asset quality concerns, credit information company Transunion Cibil said.
The lenders will prefer the low-risk home loans segment for their retail credit growth, but demand for such credit is set to decline the most as houses become unaffordable and the economic conditions make one defer purchases, it said.
The CIC analysed data from the global financial crisis of 2008-09 and also the macroeconomic numbers estimates before arriving at the conclusions.
"Despite the Indian government launching one of the largest economic relief packages in the world, the social, financial and economic impact of COVID-19 will be far reaching and will lead to a realignment of the retail credit market," its vice-president for research and consulting Abhay Kelkar said.
The CIC's study acknowledged that consumers' financial positions have changed dramatically, with many facing pay cuts and lay-offs, while there has also been a sharp drop in consumer sentiment and a significant hit to consumption demand and spending.
"Economic implications of the current crisis will have a significant bearing on the future trajectory of retail credit growth and asset quality," it added.
The company said unsecured loans' asset quality will be impacted more severely, it said, stressing that the likely impact of the COVID-19 pandemic on asset quality is going to be "complex".
The inability of some consumers to pay their debts post the moratorium period ending is likely to adversely impact their scores, and consequently the default probability may see a rise, it said.
Asset quality for the secured loans like home and auto loans will hold up better as compared to the unsecured ones like credit cards and personal loans, which are to be impacted more, it said.
Banks over the last few years have almost exclusively relied on the more resilient retail loans segment for their incremental lending as the corporate demand either slowed down due to the economic sluggishness or it was unfeasible to lend to because of asset quality concerns.