The Hindu : Business : Not sub-prime, but retail lending on the rise in India

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Wednesday, Aug 29, 2007
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Not sub-prime, but retail lending on the rise in India

Special Correspondent

Banks need to be more cautious, says AEP study

NEW DELHI: Though the Indian financial sector does not have a sub-prime market, retail lending has increased by over 30 per cent between March 2006 and March 2007 and this calls for a caution, an Assocham Eco Pulse (AEP) study has revealed.

As per the AEP study on ‘Retail lending’, ICICI Bank’s retail advances increased by 39 per cent as at March 31, 2007, which constituted 65 per cent of advances. Centurion Bank of Punjab has focused on the growth of retail business.

Its retail loans account for 68 per cent of net advances. Similarly, Punjab National Bank’s retail credit constitutes 22.7 per cent of its net credit. Retail loans of State Bank of India constitute 21.50 per cent of its total loan book.

“In the backdrop of increased focus on retail strategy and volatility of the financial markets, Indian banks need to be more cautious while making disbursements in the retail sector. They would do well to closely monitor their personal loan portfolios,” Assocham President, Venugopal Dhoot, said without sounding “alarmist”.

Rising competition has seen over-leveraging of customers, which along with rising rates may cause a rise in delinquencies.

Even though this market is nascent, it is one of the fastest-growing loan segments.

Unlike in the U.S., there is no sub-prime market in India. The U.S. sub-prime market consisted primarily of people with little or no credit-worthiness, most of them charged to sub-prime borrowers being mortgage loans. In India, the lower-end of the personal loan market may be considered as a segment carrying some of the risks attached to the sub-prime.

Personal loans

Most customers in India are first-time borrowers from the organised market, and hence, have no credit history.

The AEP study found that the big personal loans with an average size of around Rs. 90,000 are given to more established individuals at lower rates of 14-28 per cent against the 30-55 per cent level.

Competition in the personal loans market has increased with the entry of multinationals, private banks and NBFCs.

Though some players like Citi Financial and Fullerton go through a personal screening of customers, this is not a practice being followed by everyone.

Therefore, even though, India is not exposed to sub-prime lending, the likely recession in the U.S. market may affect the entire world economy.

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