Small Borrowers Show Reluctance to Maximize Credit Limits as Interest Rates Rise
Utilization of Sanctioned Loans Declines Among Small Borrowers
Small borrower, particularly those with loans of up to ₹2 lakh, have shown a cautious approach towards using their approved credit limits since December, following a rise in interest rates. Recent data released by the Reserve Bank of India (RBI) reveals a decline in credit use, with figures dropping from 67.3% in December to 66.9% in March, and going 65.5% in June—a period during which their total credit limit add to. The RBI defines “small payer accounts” as those with credit limits not beyond ₹2 lakh, and including parties or entities with fairly modest credit conditions. home loan interest rate also
Sanctioned Loans Outpace Outstanding Loans interest rate
During the June quarter, sanctioned loans of up to ₹2 lakh exhibited a 14% year-on-year growth, surpassing the growth of outstanding loans, which stood at 11.5%.same with home loan interest rate
Micro Businesses at Higher Risk ( Interest Rate )
Experts attribute this trend to the vulnerability of micro businesses to fluctuations in interest rates. The repo rate, an influential benchmark for loan pricing, has increased by 250 basis points (bps) from May 2021 to February 2022, reaching 6.5% before a pause in April. Small borrowers fall under the external benchmark regime, thus experiencing the direct impact of repo rate changes on their finance costs. Same with home loan interest rate
Constraints of Credit Card Limits
Economists point out that the decline in credit utilization also encompasses credit card limits, signifying that although banks have increased limits, borrowers have refrained from fully utilizing them. This collective behavior among small borrowers attributed to the transmission of repo rate changes and its consequent impact on financial commitments.
Impact on Borrower Landscape
Loans of up to ₹2 lakh constitute 74% of total borrowers and 7.4% of outstanding loans as of the June quarter, compared to 75% and 7.6% respectively in June 2022. Analysts suggest that the decline in utilization linked to the prevailing uncertain business environment for small enterprises. The latest analysis by Bank of Baroda reveals concerns regarding the top line growth of micro, small, and medium enterprises (MSMEs) in the June quarter, despite improvements in the bottom line. The aftermath of the Covid-19 pandemic has continued to affect small businesses, with some owners even closing their operations and relocating to rural areas for agricultural employment opportunities.
Economic Outlook for Small Businesses
Madan Sabnavis, Chief Economist at Bank of Baroda, highlights that although the Indian economy performs well, the growth is predominantly driven by large companies. Small businesses are still grappling with the lingering effects of the pandemic, hindering their operations and compelling some owners to seek alternative livelihoods in rural areas.
By maintaining a cautious stance towards utilizing credit limits, small borrowers aim to manage their financial obligations effectively amidst the evolving economic landscape and changing interest rate scenario.
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