Demand for Two-Wheeler and Consumer Durable Loans Experience Largest Initial Impact from Demonetization

TransUnion CIBIL analyzes the impact of demonetization on credit demand
Mumbai, January 11, 2017: Consumer loan demand for two-wheeler and consumer durable loans has seen significant drops since the Nov. 8, 2016 demonetization announcement, according to a new analysis by TransUnion CIBIL. At the same time, demand for other consumer loan types, including credit cards and auto loans, have crept up through Dec 2016, after a sharp decline that was the immediate response to the announcement. The analysis looked at the impact of demonetization on credit demand for the period of Nov-Dec, 2016.
Following unprecedented consumer credit growth over the past four years, including loans for vehicles and homes, credit cards and other unsecured credit products, the announcement on demonetization created short-term disruption in the demand for consumer credit. However, the impact has not been uniform across lenders, geographies or loan types; data as recent as December 2016 show a recovery across both the demand and supply side for retail loans. TransUnion CIBIL has analysed the changes in demand for credit (measured by the number of individuals applying for credit) and is partnering with lenders to design strategies to help drive growth and credit penetration.
Prior to Nov. 8, credit demand was growing at an average 35% on an annual basis across all loan products, with significant year-over-year growth in demand for consumer loans (up 71%) and credit cards (up 41%). This growth was seen broadly across the spectrum of lenders.
These growth rate were broad-based across all geographies and were accompanied by historically low non-performing asset (NPA) rates as banks instituted strong, data-driven risk management practices.
“In the week after the demonetization announcement, TransUnion CIBIL saw a significant decrease in new credit demand, with the focus for both consumers and bankers being cash exchange and collections” said Ms. Amrita Mitra, Vice President- financial services research and consulting at TransUnion CIBIL. “Two-wheeler and consumer durable loans, usually serviced by Private Banks and NBFCs, were most negatively impacted—significantly in key geographies like Maharashtra, Gujarat, Andhra Pradesh & West Bengal.”
The chart below highlights the percentage change in credit inquiry volumes against expected volumes for the period of 01st Nov 2016 to 31st Dec 2016 for key consumer credit products.
“Interestingly, credit card applications were the least impacted by the announcement, and in fact registered growth of more than 50% over the same period last year. This growth in credit card applications has been one of the significant highlights of our analysis and can be attributed to the “go cashless” objective of the demonetization policy. We believe the demonetization policy is set to pave the path toward a more cashless economy, in turn fuelling wider credit penetration and financial inclusion,” added Ms. Mitra.
Interestingly, analysis of the risk profiles of these consumers showed no material deterioration in the credit quality of new loan applicants, except in limited geographies and loan types. This finding implies that the drop in demand was broad based across all consumers rather than disproportionately impacting specific consumer segments. In particular, TransUnion CIBIL’s analysis found that the percentage of high-risk consumers (those with a CIBIL score below 700) requesting credit did not change in the period of the largest drop in volume.
“Times of change and uncertainty can often bring financial stress to consumers. It is important for lenders to distinguish, to the extent possible, between incidental and structural risk for any prospective borrower—in other words, are people riskier because of the specific conditions surrounding the announcement, or because they are otherwise financially constrained? TransUnion CIBIL is partnering with lenders to deliver advanced predictive insights, to help them make effective risk decisions both on their existing customers and when a consumer applies for a loan” Ms. Mitra said.
TransUnion CIBIL will continue to analyse credit application, origination and performance data to monitor how consumer behaviour is changing over the next few months. “We will accelerate our efforts to increase awareness among consumers on the importance of a healthy credit score and report for faster and more affordable access to consumer credit,” added Ms. Mitra.