Everyone across the globe has experienced the dent caused by the COVID-19 global pandemic. Not only India but all developed countries experienced considerable losses in terms of mankind and resources that resulted in a decline in the economy.
According to the researchers, it will take nearly 4-5 years to recover from this pandemic and bring the economy back on track.
Among all those affected, retail users are the most.
Retail users with various loans are found unable to repay them and hence have experienced substantial monetary losses.
The 1st wave of COVID-19 caused a complete lockdown across the country (India) for 2-3 months which was acceptable to some extent. However, the same happened in the 2nd wave when retail users were expecting to recover their losses.
Many of you aren't aware of what a retail user is and what loans we are talking about. So, before acknowledging how the 2nd wave of covid-19 affected the retail loans, it's essential to understand the basic terminologies.
A retail loan is a loan provided to a retail user (individual) by any financial institution or commercial bank for purchasing a vehicle, property, or any electronic commodity. Credit score plays a significant role in deciding the eligibility of retail loans. Every bank looks for a disciplined retail user who can make timely repayments. This provides a good repayment history and builds a good credit score for future loan options.
The past loan repayment history and current credit score play a significant role in getting a new loan from a legit financial institution or commercial banking body.
Retail users more often consider loans from retail banking due to numerous reasons. Below are the advantages of getting a retail loan in India.
Easy Repayment Options: No bank can even ask you to make full repayment at any point of time. Hence, you get a steady and long-term repayment option for your loan amount. This gives you the mental freedom to pay into chunks and still continue using your property, vehicle, or other purchased commodity.
Nowadays, Retail Loans are Insured: Yes, many of you don't know that retail loans are also insured. It means, in case of mishappening (before loan clearance), the entire loan amount will be dismissed, and complete ownership will be transferred to your nearest relation.
Available at Fixed and Flexible Rate: You can choose from the fixed interest rate or a flexible interest rate based on your market analysis. More often, the flexible interest rate is recommended to take advantage of decreasing rates in the future.
No Full Upfront Required: Whatever you buy, total upfront is always a heck that restricts you from making the right investment. Whether you are planning to start a business or planning your dream home, you (retail user) can't pay the total upfront. Here comes the role of retail loans. It helps you pay a small down payment and cover the rest amount into monthly instalments.
Housing loans: Real estate is expensive, and hence it requires years for a retail user to save the total amount and purchase their dream home without getting affected by inflation. A housing loan is one of the retail loans that is commonly availed to own a dream home.
Educational Loans: This type of loan is more often considered by students who lack enough funds or planning for higher education. This includes money for foreign education, hostel expenses, tuition fees, and other included expenses.
Vehicle Loans: It is the most common retail loan used in India. From commuter bikes to high-end cars, retail buyers always consider vehicle loans to fulfill their short-term wishes and purchase their dream vehicle. Here, the interest rate, minimum down payment varies from bank to bank.
Personal Loans: For unpredicted or pre-planned situations like marriage, travelling, medical emergency, etc., you need a small yet significant amount for immediate financial assistance. A personal loan helps you in such a scenario.
Today, retail loans have become a boon for the commoner to fulfil their dream. However, with the increasing competition and growing demand for retail loans, financial institutes & banks have become cautious of who they are lending money to. In any condition, timely repayment is a must.
According to the Financial Stability Report (FSR) released by the Reserve Bank of India, the gross non-performing assets (GNPAs) ratio of banks may rise to 9.8 percent by March 2022, under a baseline scenario, from 7.48 percent in March 2021.
Now comes the most essential yet critical question, i.e., how the retail loans are badly affected due to the 2nd wave of COVID-19.
Below are the major consequences of the second wave of Covif-19 on retail loans.
Increased Loan Defaulters: The 2nd wave has ruptured the Indian economy, and retail users are badly affected by it. People with retail loans are unable to repay the dues and hence are listed as defaulters.
FACT: Yes Bank has a pile of delinquent loans that have contributed to 15% of its loan book as of March.
A retailer is considered a loan defaulter if they cannot repay the monthly EMIs for more than 90 days. They are often termed as stage-3 bad loans.
The stage-3 bad loans have increased a lot due to a surge in COVID cases, increased job losses, and pay cuts across all major industries.
Minimize Loan Demands: During the 2nd wave of covid-19, the Indian banking sector has experienced a huge dip in demand for retail loans. This is the highest dip in the last 13 years, which has brought the boom of retail loans to an end (to some extent).
FACT: Last year, Yes Bank disbursed just â‚¹7828 crores in the June quarter, whereas it was just â‚¹5099 crore retail loans in this quarter.
This is only the case of retail users who are unable to repay loans. Many retail loans are even skipped wilfully. According to the sources, public sector banks accounted for around 82% of the total increase in wilful defaulter amounts, which has increased burdens on the banking sector.
Moreover, the default rate before COVID-19 was nearly 2-3 percent which increased to 6-8 percent after the global outbreak.
All in all, this is collectively affecting the collection of banks and non-banking finance companies.
There isn't an assured point that highlights the reason why retail users face such a situation and why retail loans are badly affected after covid-19 2nd wave. However, some of the prime reasons are listed below.
Increased Unemployment: The unemployment rate has increased a lot after COVID cases surge across the nation. According to the sources, nearly 1 crore people lost their jobs due to the 2nd wave of the corona pandemic, which is a significant count. As of 3rd June 2021, the unemployment rate counts at 12.4%, urban 15.1%, and rural 11.2%.
No Financial Backup: Not all retail users were prepared for the 2nd wave. A common man was predicting normality after the lockdown was rolled up in June last year. The common man was already expecting to bring their finances on track, and suddenly, the 2nd wave caused big damage to them again.
FACT: Sources say that income of 97% of households has declined since the outbreak of the pandemic last year.
This caused damage to their budget planning and brought their financial backup to zero.
No Government Policy for Support: Compared to last year's government support for the COVID hit economy, no support was provided this time. During the 2nd wave of covid-19, no help was offered by the government. Hence, the retail users were left with no other option to hold the repayments and become defaulters (in extreme situations).
No Payment Rescheduling Option (this time): During the 1st wave of covid-19, retail users were allowed to skip their EMIs and repayments for 3-4 months based on their financial capabilities. This rescheduling option was offered without any penalty. However, this rescheduling option wasn't offered this time, affecting the commoner badly.
FACT: According to Azim Premji University, the 1st wave of the COVID-19 pandemic has pushed 23 crore people below the poverty line.
Finally, you are aware of how the covid-19 damaged the backbone of the Indian economy and who, among all residents, are highly affected. Undoubtedly, middlemen with retail loans have a substantial financial burden yet to be overcome in the coming years.
FACT: Between 2016 and 2019, growth decelerated from 8.3% to 4%.
So, you can imagine how the economy has worked in India after a massive surge of COVID cases across the nation.
Last year, India imposed a stringent lockdown that contracted the economy to -24% in the June 2020 quarter, followed by a -7.3% till September. This brings the Indian economy to a rare recession scenario that demands significant time to recover and run on track.
So, what do you think about how retail loans will work in the coming years. Moreover, how much time will it take to bring the retail loans back to normalcy?