Has personal loans seen a rebound ahead of the festive season? The answer is in the negative
Just before Dhanteras and Diwali this year, the Reserve Bank of India (RBI) released the November edition of its monthly bulletin. The latest RBI Monthly Bulletin says that the GDP has contracted by -8.6 percent in the second quarter of fiscal year 2020-21 (i.e. July-September, 2020) as compared to the gross domestic product (GDP) during the corresponding period last year. It may be noted that India’s GDP shrunk by -23.9 percent in the first quarter of the current fiscal year. According to the RBI Monthly Bulletin of November, the country “has entered a technical recession in the first half of 2020-21 for the first time in its history with Q2:2020-21 likely to record the second successive quarter of GDP contraction.”
In the chapter "State of the Economy" of the RBI Monthly Bulletin of November, it has been mentioned that "[i]ncoming data for the month of October 2020 have brightened prospects and stirred up consumer and business confidence. With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories. If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in Q3:2020-21, ahead by a quarter of the forecast provided in the resolution of the monetary policy committee on October 9, 2020."
Against the backdrop of COVID-19 pandemic when joblessness amidst the regular/ salaried individuals is high and incomes are low, it is difficult to predict whether people will splurge during the festive season. Traditionally, Indians spend more on buying personal/ commercial vehicles, residential/ commercial properties, gold/ silver, consumer durables, kitchenware and holidaying, among others, during the festive months.
Latest data available from the RBI Bulletin (released in November) indicates that in the fortnight ended 25th September, 2020 (i.e. between 27th September, 2019 and 25th September, 2020), the year-on-year (y-o-y) growth in outstanding credit to the housing sector was 8.5 percent. However, in the fortnight ended 27th September, 2019 (i.e. between 28th September, 2018 and 27 September, 2019), outstanding credit to the housing sector had y-o-y grown by 19.3 percent. There are reasons behind the slowing down in growth for house loans, which we will discuss in the next section. Kindly check chart-1.
As opposed to personal loans for housing, a different trend in case of vehicle loans is noticed. In the fortnight ended 25th September, 2020, the y-o-y growth in outstanding credit to vehicle loans was found to be 8.8 percent, whereas in the fortnight ended 27th September, 2019, the y-o-y growth rate in vehicle credit was at a much lower level i.e. 4.1 percent. This may have happened because the pandemic has forced people to travel in their own vehicles (for reasons like safety and physical distancing) instead of relying on public transport. Unavailability of public transport during the time of phase-wise unlocking of the economy may have compelled many consumers to purchase their own vehicles backed by bank loans.
Growth in personal loans (on y-o-y basis) for consumer durables and credit card outstanding have exhibited a declining trend in the fortnight ended 25th September, 2020 vis-à-vis the fortnight ended 27th September, 2019.
In the fortnight ended 25th September, 2020, gross personal loans grew y-o-y by just 9.2 percent. However, in the fortnight ended 27th September, 2019, the y-o-y growth rate in total personal loans was at a much higher level i.e. 16.6 percent. Please consult chart-1.
In her presentation on Atmanirbhar Bharat Package 3.0 on 12th November, 2020, Finance Minister Smt. Nirmala Sitharaman has stated that "RBI predicts a strong likelihood of Indian economy returning to positive growth in Q3:2020-21, ahead by a quarter of the earlier forecast." She also added that "[p]rominent economists have suggested that the rebound is not only due to pent up demand, but also strong economic growth."
Latest data available from the Weekly Statistical Supplement - Extract (URL is https://rbi.org.in/Scripts/BS_viewWssExtract.aspx) of the RBI, however, shows that the growth in non-food credit (of which, personal loans is a part) fell to 5.15 percent y-o-y during the fortnight ended October 23rd, 2020 from 5.68 percent growth seen in the previous fortnight. Most Indian banks are hopeful about a rise in credit offtake in the second half of fiscal year 2020-21.
The Weekly Statistical Supplement - Extract (available at https://rbi.org.in/Scripts/BS_viewWssExtract.aspx) of the RBI indicates that in the fortnight ended 23rd October, 2020, aggregate deposits grew y-o-y by 10.1 percent. In the fortnight ended 9th October, 2020, the y-o-y growth rate in aggregate deposits was 10.5 percent.
Based on the data provided by the Weekly Statistical Supplement – Extract, the Inclusive Media for Change team has calculated that the credit-to-deposit (CD) ratio of the banking system, or the proportion of deposits deployed as loans, was 72.32 percent in the fortnight ended 9th October, 2020 and 72.34 percent in the fortnight ended 23rd October, 2020.
In the meanwhile, we will have to wait to get the personal loans data and trends during the festive season, particularly in and around Dhanteras.
In the following two sections, we will discuss the broad trends in housing prices and registration of vehicles in the country.
Against the backdrop of pandemic and economic recession, many financial consultants would have asked their clients to invest in real estate. This is because payment of rents has become a financial burden for many consumers due to falling incomes and a rise in joblessness. Besides, one could have availed the EMI moratorium of the RBI, thus making home loans a preferred option in comparison to paying rents in India. Nevertheless, a rational consumer has to keep in mind that not all properties in all the locations would fetch similar returns on the investment made.
A person who is buying a residential property has to also keep in mind that its price depends on several factors, including location (proximity to facilities like schools, hospitals, workplaces and markets, distance from public transport, quality of roads, etc.), neighbourhood and safety, quality of construction, amenities (like electricity, water supply, house cleaning services, etc.) and age of building, among other things.
RBI’s House Price Index
The housing sector of the country suffers from large inventory overhang, tapering of incomes and hence, EMI-servicing capacity, and high stress in the balance sheets of non-banking finance companies (NBFCs) and housing finance companies (HFCs), according to the RBI Monthly Bulletin of October this year. Both sales and new launches pertaining to residential real estate contracted in the first quarter of the current fiscal year, mainly on account of the lockdown and sluggish consumer sentiment, leading to rise in inventory overhang (see chart-2a).
Chart 2: Housing Sector - Launches, Sales and Prices
Source: RBI Bulletin October 2020
The national-level housing price index of RBI decelerated during the first quarter of fiscal year 2020-21. In her presentation on Atmanirbhar Bharat Package 3.0 on 12th November, 2020, the Finance Minister has acknowledged that "economic slowdown has led to decline in prices of residential unit."
Although the sub-indices for Bengaluru registered a substantial growth, the same for Delhi contracted substantially from the previous quarter. Please consult chart-2b.
Source: RBI's Database of Indian Economy (DBIE) portal, https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics
Note: *Chennai index is based on both residential and commercial properties.
All India index is a weighted average of city indices, weights based on population proportion.
**(P) Provisional indexes which will be finalized by next quarter.
Kindly click here to access the HPI data in spreadsheet
Between 2010-11 (Q1) and 2020-21 (Q1), the average y-o-y growth of RBI's House Price Index for the cities of Delhi (14.7 percent), Bangalore (12.3 percent), Lucknow (16.2 percent), Kolkata (12.5 percent), Chennai (12.0 percent) and Kochi (12.8 percent) exceeded the average y-o-y growth of HPI prevailing at the national-level (11.9 percent). Please check table-1.
Between 2018-19 (Q1) and 2020-21 (Q1), the average y-o-y growth of RBI's HPI for Mumbai was 1.5 percent, Delhi was -0.9 percent, Bangalore was 10.7 percent, Ahmedabad was 4.9 percent, Lucknow was 4.8 percent, Kolkata was 3.4 percent, Chennai was 11.2 percent, Jaipur was 8.6 percent, Kanpur was 7.7 percent, Kochi was 10.5 percent and for India was 4.0 percent. Kindly consult table-1 for details.
The RBI Monthly Bulletin of October 2014 carries a chapter on the methodology to calculate HPI. Beginning with Mumbai city, the RBI initiated the work of compiling a HPI in 2007 and brought out a quarterly HPI for Mumbai city (base: 2002-03=100). Over the quarters, the coverage has been extended by incorporating 9 more major cities, viz., Delhi, Chennai, Kolkata, Bengaluru, Lucknow, Ahmedabad, Jaipur Kanpur and Kochi and the base is shifted to 2010-11=100. Besides separate HPI for individual cities, an average HPI representing all-India house price movement is also compiled.
Kindly note that the aggregate HPI is a weighted average price index using Laspeyres’ method with 2010-11 as the base year. First, the simple average of price (per square meter) of houses in each category, classified by small, medium and large for each ward/ administrative zone in each quarter based on floor space area (FSA) is calculated. Second, the proportion of number of houses transacted in the three categories of FSA within a ward/zone during the period April 2010 – March 2011 is taken as the weights. Then, based on an average per square meter price for three FSA category houses in each ward/ zone, price-relatives are calculated for each quarter. The price relative is nothing but a ratio of current period price to the base period price. The quarterly ward/ zone weighted average price relatives are calculated next. These weighted relative prices are again averaged, using the proportion of number of houses transacted in each ward to the total number of houses transacted in the city during the period April 2010 – March 2011 as the weights. The city-wise price indices are averaged using the population proportion (based on 2011 census) of the ten cities to its total to obtain the all-India index.
Real residential property prices of BIS
The index of real residential property prices (CPI-deflated; Index, 2010 = 100) has been developed by the Bank for International Settlements (available at https://stats.bis.org/statx/srs/table/h2).
Table 2: Index of real residential property prices (CPI-deflated; Index, 2010 = 100)
Source: Bank for International Settlements, available at https://stats.bis.org/statx/srs/table/h2
For India the index has dipped in the first quarter of 2020 (i.e. 171.1) in comparison to not only the last quarter of 2019 (i.e. 172.2), but also the first quarter of 2019 (i.e. 175.7). A similar trend has been noticed for China. However, for the United States and for the United Kingdom, one finds that the pessimism arising out of global economic slowdown did not affect the index in the first quarter of 2020. Please see table-2.
For India, it can also be observed that the index has been going down since 2019.
Atmanirbhar Bharat Package 3.0 for housing
It should be noted by the readers that under the Atmanirbhar Bharat Package 3.0, announced on 12th November, 2020, first-time purchasers of residential houses/ flats costing up to Rs. 2 crore will get income tax relief of up to 20 percent (under section 56(2)(x) of Income Tax Act) and this will be available till June 30, 2021. Apart from that, the differential between circle rate (stamp duty value) and agreement value (purchase value) for primary sale of residential units of up to Rs. 2 crore, has been doubled from 10 percent to 20 percent (under section 43CA of Income Tax Act) till June 30th next year. The tax relief, which has been provided to the middle class as incentives, is expected to boost demand for residential properties and to clear the existing inventories.
According to developers and property dealers, although property prices in most metro cities have corrected in the midst of economic slowdown (that has been happening since the last few years), the circle rates (i.e. ready reckoner rates) have gone up. The circle rates are not linked to actual prices. However, circle rates have been raised in the recent years by the states to increase their revenue despite a fall in prices. Most developers and property dealers think that the recently announced relaxations by the government could have been extended for commercial real estate, besides property worth more than Rs. 2 crore.
Registration of vehicles
The latest RBI Monthly Bulletin has mentioned that "[c]ar manufacturing majors are reporting double digit growth in response to festival demand and restocking as well as shift in preferences towards owned vehicles over public transportation. The ebullience is not, however, shared by dealerships. According to the Federation of Automobile Dealers Associations (FADA), sales of two-wheelers and passenger vehicles declined by 27 percent and 9 percent, respectively, in October 2020. The decline was sharper in the case of commercial vehicles and three-wheelers, which registered a contraction of 30 percent and 65 percent, respectively."
The total number of vehicles registered in the country was 1.92 crore in 2016, 2.09 crore in 2017 (8.63 percent growth over previous year), 2.27 crore in 2018 (8.87 percent growth over previous year), 2.15 crore in 2019 (-5.52 percent growth over previous year) and 1.34 crore in 2020 (as on 16th November, 2020).
Table 3: Monthwise number of vehicles registered (in lakhs) in India and their y-o-y growth (in %)
Source: Vahan dashboard of Parivahan Sewa portal of MoRTH, https://vahan.parivahan.gov.in/vahan4dashboard/, accessed on 16th November, 2020
In order to understand the gravity of the problem experienced by the automobile sector, it is important to look at the recent figures related to registration of vehicles. Latest data available from the Parivahan Sewa portal (https://vahan.parivahan.gov.in/vahan4dashboard/) of the Ministry of Road Transport & Highways (MoRTH) indicates that in 2019, the y-o-y growth in vehicle registration was negative in most months with the exception of January, October and November. In 2020, although the y-o-y growth in vehicle registration became positive in February and March, since the imposition of lockdown (and subsequently unlockdown) the y-o-y growth in vehicle registration has remained in negative territory. Please see table-3.
Despite a far greater decline in vehicle registration in 2020 as compared to 2019 (as stated earlier in this section), we have witnessed a rising trend for growth in vehicle loans in the fortnight ended 25th September, 2020 vis-à-vis the fortnight ended 27th September, 2019 (please consult chart-1). This contradiction needs to be explained by the official economists.
RBI Monthly Bulletin November 2020, please click here to read more
RBI Monthly Bulletin October 2020, please click here to read more
RBI Monthly Bulletin November 2019, please click here to read more
Methodology on House Price Index, RBI Monthly Bulletin October 2014, please click here to read more
Residential property prices: selected series (nominal and real), Bank for International Settlements, please click here to access
Press release: Income Tax relief for Real-estate Developers and Home Buyers, Press Information Bureau, Ministry of Finance, 13 November, 2020, please click here to access
Presentation on Atmanirbhar Bharat Package 3.0 dated 12 November 2020, Ministry of Finance, please click here to read more
News alert: Declining bank credit indicates poor economic performance, Published on July 10, 2017, Inclusive Media for Change, please click here to read more
The Hindu Explains: What is technical recession, and what does it mean for the Indian economy? -Suresh Seshadri, The Hindu, 15 November, 2020, please click here to read more
Explained: What is a technical recession? -Udit Misra, The Indian Express, 13 November, 2020, please click here to read more
Realty tax sop is unlikely to make a dent in metro cities due to caps -Manojit Saha, ThePrint.in, 13 November, 2020, please click here to read more
Income Tax Relief For Developers, Home-Buyers To Boost Real Estate Demand, NDTV, 12 November, 2020, please click here to read more
Non-food credit growth slips to 5.15% during fortnight ended October 23, Financial Express, 10 November, 2020, please click here to read more
Why you’ll never go wrong with real estate investment, Financial Express, 27 October, 2020, please click here to read more
How much does a house cost in Hyderabad? Livemint.com, 13 August, 2020, please click here to read more
Image Courtesy: Inclusive Media for Change/ Himanshu Joshi
Tagged with: Atmanirbhar Bharat Atmanirbhar Bharat Package 3.0 Bank for International Settlements BIS Dhanteras House Price Index Housing Loans Housing Prices Ministry of Road Transport & Highways Parivahan Sewa Personal Loans RBI RBI Monthly Bulletin Real Residential Property Prices Reserve Bank of India Vehicle Loans Ministry of Road Transport & Highways