Personal loan margins are thin and don’t take risks above the appetite: Sumit Bali, Group Director and Head of Personal Loans, Axis Bank

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Sumit Bali, Group Executive & Head – Retail Lending, Axis Bank

Retail lending has recovered well from April-May lows, but supply issues are hampering auto loan growth, Sumit Bali, group director and head of retail lending, Axis Bank, told Shritama Bose. The bank avoids aggressive risk-taking in home loans because the margins are slim, he added. Extracts:

How did the retail market recover from the second wave of Covid?
Obviously we’ve had a very good Q4 as an industry and in particular for us if you see the numbers we’ve grown almost 6% quarter-on-quarter. So we entered the first quarter of this fiscal year with that kind of momentum, but after April 20 the bottom just fell. Over the next two months, the deterioration was extremely strong. There was fear, people were delaying everything, they were sitting on cash, preserving cash. Even we couldn’t go out to collect or meet clients. But since July, we have also seen a larger increase. Last month, home sales were back to almost 95% of March levels. When we see other metrics, especially on the cards side, these also indicate a clear recovery. When you cut spending on cards, a lot of the discretionary spending that was gone – travel, dining, dining, hotels, etc. But overall, spending has been record high for the industry. This means that customer confidence is coming back. There is a marked improvement in delinquency metrics across the industry when we see the data from the office.

What about the auto loan segment?
Interestingly, on the new car side, demand is good, but supply issues persist due to the chip shortage. This creates a different kind of problem for us. When we spoke to the manufacturing industry people in July, they said production should be normal in October-November. It doesn’t look like that. There’s an unexpected closure of a Bosch factory in Malaysia due to Covid, so it’s not quite gone. Given the long waiting periods, we can see that the demand for cars is also coming back. Used car prices are on the rise. One of the unexpected benefits of Covid is the demand for larger homes, so people can work from home and children can study from home online. The second thing is the need for personal mobility. So when you put it all together, we’re definitely entering the holiday season with quite a bit of tailwinds and really good customer confidence. But for a third wave of Covid, things started to look pretty good.

There is a lot of competition in the home loan segment. You seem to have stayed away from rock bottom prices. How do you see this market?
As a bank, we have very clearly defined our appetite for risk and in personal credit the margins are slim. It makes no sense to take risks higher than your appetite. When you lose money, you lose a good deal of capital. So we haven’t diluted our standards.

Rates can only increase from current levels. Is there a risk of accumulation in the system?
The RBI (Reserve Bank of India) did a very smart thing by setting the LTV (loan-to-value) on home loans at 75%. There is a very strong association of the client with his house. After the Covid, people want a place to call home. You see inflation rising, so everyone expects rates to firm over time. But, in home loans, you also have this possibility of extending the term while keeping the EMI the same. If rates go up, that would mean there is good demand. Therefore, we don’t see a big risk in there, given the margin and the fact that we can keep the monthly outputs the same.

We are seeing an increase in repossession notices for properties from small borrowers. Is repossession really on the rise?
Thus, for almost a year, there was no activity in terms of takeover or sale. In view of the environment, the courts also insisted on granting authorizations. Now all of this has started to open up. So there are authorizations coming in, there is an authorization to sell the inventory. In cases where customers have suffered significant losses and cannot honor (their loans), auctions take place. What you are seeing now, in a normal economic environment, you would have seen over a 15 month period. It’s just that they got together.

Do you continue to be cautious about unsecured loans like you were until the start of this year?
We’ve always said that from some sort of 80:20 split, which we have in June, we’d be comfortable going a little bit more to unsecured. It can be, say, 22-23% over a period of time. This remains our stated ambition and we are working in this direction. The second wave of Covid put a stop to this, but our focus remains that.

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