Credit

Mumbai: The credit growth is likely to moderate to 13-13.5 per cent this fiscal but will improve slightly to 13.5-14 per cent next financial year as the economic pace picks up, according to a report. The biggest factor driving the moderation is low demand in wholesale credit, which constitutes as much as 60 per cent of the overall credit. Wholesale credit is seen slowing to 11-11.5 per cent this fiscal from a decadal high of 15 per cent in 2022-23, Crisil Ratings said in a report on Thursday.

A key monitorable, which will determine credit growth going forward, is the extent to which deposit growth picks up for banks, Crisil Ratings said.

The retail credit demand will continue to go up in this fiscal but corporate credit demand is lagging, which is likely to pick up in the next fiscal on capex revival, the report noted.

In absolute terms, overall bank credit stood at Rs 148 lakh crore in FY23, clipping at 15.9 per cent year-on-year, and this is likely to grow to Rs 168 lakh crore or 13-13.5 per cent this fiscal and further grow to Rs 191 lakh crore or 13.5-14 per cent in the next, it added.

According to the agency, the credit demand moderation this fiscal will be because of the following four key reasons — gross domestic product growth is expected to fall to 6 per cent this fiscal from 7.2 per cent last fiscal, which will impact the overall credit growth.

Secondly, the easing of inflation with some softening in commodity prices. A significant part of the growth in wholesale credit (comprising corporates and micro, small and medium enterprises) last fiscal was driven by higher working capital demand in a high-inflation environment. Going forward, inflation levels are expected to be lower than the last fiscal.

Thirdly, robust bond issuances in the first half of this fiscal with the changes in interest rates have seen a substitution of bank credit with debt capital, which also supported wholesale credit growth last year, especially in the first half. But this is not seen to the same extent this year.

Finally, given the strong growth in fiscal 2023, especially in the second half, the high-base effect will also be a factor, said the agency.

The retail credit, which is 28 per cent of overall credit, is expected to continue to grow at a healthy rate of 19-20 per cent, similar to last fiscal.

According to Krishnan Sitaraman , a senior director and chief ratings officer at the agency, the next fiscal should see a turnaround in overall credit growth and start inching up on the back of an expected improvement in GDP growth to 6.9 per cent. Within this, wholesale credit is likely to see a modest increase to 11.5-12 per cent, while retail should continue to remain the key growth driver, expanding steadily at 19-20 per cent. Agriculture credit growth should remain range-bound at 9-10 per cent.

Corporate credit, which is 45 per cent of overall bank credit, is likely to pick up next fiscal from the current fiscal level, driven by a more than expected revival in private industrial capex on the back of more capex announcements next fiscal.

On the services side, demand from non-banks should continue to support corporate credit growth on the back of their decent growth tailwinds.

In the MSME segment, which is 15 per cent of overall credit, the credit demand should be steady hereon, given their role in the overall economy and the flow-through impact of the productivity-linked incentive scheme. Further, with the steady push for the formalisation of the sector, including improving digital public infrastructure, the addressable base for banks should increase over the medium term, Sitaraman said.

Retail credit growth, which should remain robust at 19-20 per cent next fiscal — similar to the previous two fiscals, will be driven by steady demand for home loans, the largest sub-segment of retail credit.

Unsecured loans (personal loans and credit cards) are expected to grow faster, driven by greater digitisation, a shift to organised credit, and increasing comfort with borrowing for discretionary spending.

According to Subha Sri Narayanan , a director with the agency, overall, while demand drivers for credit are expected to sustain a 13-14 per cent growth in the next two fiscals, it will also be important from a funding perspective that deposit growth does not lag too far behind.

He expects the differential between credit growth and deposit growth to narrow to 200 bps from the 500 bps seen in fiscal 2023 as deposit rates continue to inch up.

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Credit card spending by Indians surged to a record high, raising concerns of potential defaults as indebted households stepped up their borrowing spree ahead of the festive season that kicked off this month.

The amount transacted through cards rose to an all-time high of 1.48 trillion rupees ($17.8 billion) in August, up from July’s 1.45 trillion rupees, according to the latest data by the Reserve Bank of India. The spending binge is in line with rising indebtedness and falling savings among Indians and may point to growing stress as incomes stagnate.

The card spends “indicates people are borrowing to spend,” said Rupa Rege Nitsure, Group Chief Economist of L&T Finance. “As loans on credit cards are unsecured, there is a risk of high defaults,” particularly if economic growth slows later in the year.

The rising spends also points to an aggressive retail push by lenders in the under-banked market with a 1.4 billion population. Post pandemic, banks have expanded their balance sheet mainly by funding individuals, while credit demand from businesses has somewhat lagged.

Record-low rates offered to meet pent-up demand has seen banks’ retail loan portfolio double between 2019 and now, raising concerns among policymakers.

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Getting a credit card is easy if you are employed and your income is above the monthly income eligibility set by the credit card issuer. This is because before issuing a credit card , banks typically evaluate an applicant’s income to assess whether the individual will be able to repay them or not. But is it possible to get a credit card if you are not employed — what if you are, say, a student, a retired person or a homemaker? Also, can you get a credit card without any proof of income? Read on to find out.

Yes, you can get a standard credit card without income proof
It is not impossible to get a credit card if you don’t have a job or proof of income as credit card providers look for an alternative method to ascertain your repayment capacity. “In the absence of income proof or a salary account, an applicant’s income can be evaluated via surrogate indicators such as the number of loan-account relationships and repayment history from credit bureaus, or the wealth relationship the customer holds with the issuer,” says Sajish Pillai, MD & Head-Assets and Strategic Alliances, Consumer Banking Group, DBS Bank India.

Proof of income is not the only way to understand the repayment capability of a credit card applicant. Banks have multiple ways to check the credibility of a customer who does not have salary-account statements or payslips. “If a customer is a credit-bureau tested customer and has a very good bureau score and an established track record of repayment of other cards or loans for a sufficient time, a credit card issuer may consider the application on merit and issue a credit card basis this track record,” says Shailendra Singh, MD & CEO of Bank of Baroda(BoB) Financial.

Another popular method gaining traction nowadays is the account aggregator framework-based lending. In this format, banks only need consent from a customer to directly get access to the person’s financial transactions such as bank statements, Form 26AS and GSTR-3b for businesses. “Most credit card issuers have built lending guidelines around these methods to underwrite customers without them having to go through the rigamarole of financial documentation,” he adds.

Kotak Mahindra Bank has developed deep analytical capabilities to analyse aggregates of data — like relationships with the bank, spend patterns, Unified Payments Interface (UPI) transactions, credit bureau information, alternative data/score — to underwrite customers, says Frederick D’Souza, Business Head-Credit Cards, Kotak Mahindra Bank.

Many credit providers now have a special process to issue credit cards to people who may not have income proof but possess a robust financial capacity, which can be identified through various surrogate methods. Moreover, there are other special credit card products that are designed to be offered without a proof of income.

Secured credit card against FD
If you have invested in a fixed deposit (FD), you can get a secured credit card against it. You do not need to provide your income details to get a credit card against FD . It offers benefits similar to a usual credit card. However, your credit limit will typically be 75%-90% of the FD value, says Dev Ashish, a SEBI-registered investment advisor and Founder of StableInvestor.com.

Banks offer credit cards against fixed deposits to those who don’t have a credit history or don’t have income proof. The deposit acts as collateral or security. Banks put a lien on the FD till the customer uses the card.

This type of card can be useful for those who are just starting their career and want to build up credit history. Having a good credit history comes in handy later in life to take home or other loans.

“Customers can choose to apply online or visit a branch and provide the required documents. The bank then assesses the application, and upon approval, customers can either collect the card from the branch or have it delivered to their registered address,” adds Ashish.

You can get an add-on credit card against a primary credit card
You can also opt for an add-on or supplementary credit card without any proof of income if someone in your family has a primary or standard credit card. An add-on card is an additional card issued under a primary credit card. It is usually available for the primary cardholder’s spouse, parents, siblings, and children aged 18 or more. “The primary cardholder is responsible for any debts incurred on the add-on card,” says Pillai.

In the case of add-on cards, the total credit limit is usually shared between the primary and add-on cardholders. A single statement is generated for both the cards. The primary cardholder has the option to earmark a certain percentage of the credit limit to an add-on card linked to his account.

“Since contractually it is the primary cardholder who is liable to pay for the card dues, the add-on cardholder does not have any contractual obligation and hence no financial due diligence other than KYC is carried out for add-on cards,” says Singh.

How can you get an add-on credit card? The primary cardholder has to first check with the bank to know if the service exists for the card. “The next step is to fill out an application form and provide information about the intended add-on cardholder. Typically, income proof is not necessary; however, the customer may need to submit proof of identity and address for the applicant. Once the application is approved, the credit card issuer will send the add-on card to the provided address,” Pillai says.

An add-on credit card could be helpful for students or homemakers. Do remember that these cards do not help the secondary holders build a credit history.

Pre-approved credit cards against savings account
If you have a lumpsum amount in your savings account, you may get a credit card against it. “Your bank may pre-approve you for a credit card based on your transactions in your savings account even without any additional income proof,” says Adhil Shetty, CEO of BankBazaar.com.

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You may have taken a loan with a certain plan of repaying it on time, but life has thrown you a curveball and you are now struggling to repay it. Or you have a mounting credit card outstanding, and you find it difficult to pay it due to some unavoidable circumstances such as medical emergencies or job loss. At times like these, should you go for a one-time loan settlement with your bank? There is no straight answer. However, if you have to opt for a one-time loan settlement option, you should know how it works and how it will impact your credit score or profile.

Loan-settlement: Which loan should you settle?

A borrower owes not only the principal but also the accrued interest and any incidental charges levied by the lender. Paying dues on time is the primary obligation of the borrower and the lender has the right to recover the entire amount. However, in case of exceptional circumstances, a borrower can request the lender for a one-time loan settlement that will allow the borrower to repay a lower amount than what is owed to the lender. But it has some serious consequences for the borrower’s ability to access credit later.

You can settle any type of loans — personal, auto, home, education, business or credit card debt. But it is of utmost importance to remain cautious of certain points while taking a decision on settling your loan as it will have a significant impact on your credit score and financial future, says Gaurav Jalan, CEO & Founder of instant loan platform mPokket.

Loan settlement should be a last resort. If you exhaust all avenues to pay your monthly loan instalments, only then should you contemplate settling the loan. “You should consider loan settlement if you are unable to make your monthly payments and are at risk of defaulting on the loan,” says Atul Monga, CEO and Co-Founder of Basic Home Loan. It will help you avoid legal action or bankruptcy for defaulting on loan payments.

Now, what types of loans should be settled? Raj Khosla, Founder and MD, of MyMoneyMantra.com, says, “Loan -settlement should primarily be done for unsecured loans such as personal loans, a loan against credit card and business loans. You should avoid settling secure loans such as home loans, auto loans, or loans against property, securities or gold as lenders can take possession of your assets that are mortgaged for taking the loan.”

Loan -settlement: How to decide the amount you need to settle
When you take a loan, you are obliged to repay it on time. Due to financial hardship, if you cannot repay it, you can opt for a one-settlement option. If you are wondering how much you have to pay, read on.

It is important to remember there is no fixed rule to go by while settling your loan. It will entirely depend on how you negotiate and the policies of the lender.

Based on your circumstances and financial condition, lenders may also accept partial payment. However, it is generally better to settle the loan in full if you can afford it, as this may have a lower impact on your credit score, explains Raoul Kapoor, Co-chief Executive Officer of Andromeda Sales and Distribution, a loan distributor.

“The amount you should offer to pay to settle your loan will depend on a number of factors, including the outstanding balance, the interest rate, and your ability to negotiate,” says Monga. “In general, you usually offer to pay more than the outstanding balance, but less than the total amount of interest that you would have to pay if you continued to make the monthly payments.”

For a loan settlement, lenders generally accept a lump-sum payment that is less than the total outstanding amount. If you are facing extreme crisis where arranging repayment money is very difficult then you may need to prepare for hard negotiations. While you may have to finally settle to pay a higher amount but you should start with an offer to pay a lower amount. You can start your negotiation with a proposal of paying 25 per cent or 30 per cent of the outstanding balance and explain your difficulties in detail. The specific percentage can vary widely but it can be around 30-50 per cent of the outstanding amount, mentions Ravi Kishore Goyal, Vice President, Strategy, Propelld, an education loan distributor.

However, when the outstanding amount is too big and your repayment capacity is very low, you may need to request for a much lower settlement amount. Khoshla says, “You should aim for anything between 10 and 50 per cent of the loan in the case the total outstanding amount is way higher than your yearly income. On the contrary, lenders always try to settle a loan for amounts higher than 50 per cent of the total outstanding. You have to make sure that the loan settlement amount remains as low as possible,” he adds.

If you have an old loan with a high chance of default, the loan settlement amount can go up to 50-70 per cent, says Harish Parmar, Founder, SingleDebt, a debt resolution company. However, you should consider it only if you are completely broke and do not expect a turnaround in your financials anytime in the next couple of years, says Khosla.

The settlement may happen in two forms depending upon your repayment comfort. Either you can go for one time settlement and pay the entire settlement amount at one go or you can ask the lender for structured settlement where you can pay the settlement amount in parts within a given timeline.

Should you go to a debt counselor or debt-settling agency to settle your loan?
Debt counsellors or debt settlement companies can help you to negotiate with your lender and develop a debt repayment plan. Debt settlement companies can also negotiate on your behalf and get you a lower settlement amount.

You should consider going to a debt settlement agency if you don’t have adequate knowledge or aren’t sure of debt negotiation. “Opting for professional assistance comes with clear benefits. Debt settlement companies are experienced in negotiations, often secure better terms, and handle paperwork efficiently,” says Jalan.

However, it is important to note that debt settlement companies can charge high fees. So you should do adequate research before choosing one.

The cost of using a debt settlement company will vary depending on the company and the amount of debt you are settling. Some agencies might charge a flat fee or a percentage of the debt they help settle. “In general, you can expect to pay between 15 per cent and 25 per cent of the amount of debt you settle,” says Monga. “You should always cross-verify the credentials of a financial expert, or a person/entity acting as a debt financier. Imposters and fraudsters can dupe you by providing a false hope of loan settlement.”

How does loan settlement impact your credit score?
In the final step, you should understand what will be the impact on your credit score when you
go for settlement and the bank writes off a part of your loan?

When you settle a loan, it will be reported to the credit bureaus as a “settled” account or “settled for less than the full amount,” says Kapoor. This will show on your credit report. A settled-account entry can remain on your credit report for up to seven years, says Parmar of SingleDebt. As settling a loan reflects your inability to oblige the repayments in full, it will critically impact your credit score. Although the contractual relationship between the lender and the borrower is over, your credit history remains impacted..

Can you take a loan or credit card immediately after a loan settlement?
Borrowers who have opted for loan resettlement should try and rebuild their credit score before applying again for a loan or credit card, says Rohit Chhibbar, Business Head, Paisabazaar. “It’s recommended to wait at least a year or two before applying for a fresh loan but the exact timeframe may vary. It is advisable to work on improving your credit score by making timely payments on other obligations, reducing debt, and managing your finances responsibly,” says Kapoor.

Khosla suggests that borrowers who have gone for a loan settlement can try to get a secured credit card. This way they can access interest-free (usually with 30-50 days interest free credit period) credit and can partly recondition the credit score from the damage done due to the settled status on the credit report.

Remember it is your last resort, don’t opt for it casually
Experts reiterate that loan resettlement should be the last option as it will hit your creditworthiness or credit score drastically. “Instead of opting for loan settlement at the first instance, stressed borrowers should first check for a balance transfer or repayment moratorium. If not, then they should sell assets, redeem investments or try to avail of loans against them, if possible, to make loan repayments. They should also be open to seeking help from their family and friends. If none of these suffice, then they should contact their existing lenders for a one-time loan settlement,” says Chhibbar.

Should you settle your credit card dues?
“Settling a credit card loan of a few thousand rupees is not advisable at all as the repercussions of loan settlement in the longer run outnumber the potential short-term benefits of settling a loan now. You should never compromise with your credit score by opting for a loan settlement if the total loan outstanding is 20-30 per cent of your yearly net income,” Khosla adds.

( Originally published on Aug 24, 2023 )

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