Growth Of Retail Credit In India

Posted in Finance Articles, Total Reads: 4216 , Published on 17 August 2012
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Retain lending has seen different phases in its lifetime, since the liberalization of India in 1991. Both private and public sector banks, irrespective of size have been increasingly focussing on retail segment for both resource mobilization and lending. Banks are now the primary source of retail lending, a forte previously enjoyed by NBFI’s.



Apart from domestic banks (national and private); the attractive growth potential of the Indian retail credit industry has over the past decade or so, attracted the interest of global financial institutions. This has led to significant investments in product design, distribution networks and sales teams. But the growth in credit has not been uniform. The article below highlights the variation of retail credit in India and what are the appropriate lending strategies banks should follow in today’s uncertain environment.


Reasons for surge in retail lending –

The renewed focus on retail loans is largely on account of increasing liquidity (reduction in CRR/SLR over the years), increasing autonomy (with respect to product innovation), reduced dependency on corporate customers and demand side growth drivers such as increasing disposable income, enlarging middle class, increasing population of young people, changing attitude of customers towards loans and so on. Lastly, retain banking is now accepted as less risky by banks in India.


Growth during Pre-1990 era:

However, the growth in retail credit has not been smooth, as one would expect. Prior to economic reforms in 1990, most of the banking credit was focussed on agriculture, industry and commerce. The major role of bank lending till then was to support supply. Various regulatory restrictions were in place in order to ensure limits on total amount of housing loans and loans to individuals. There were other restrictions related to rate of interest, margin stipulation and maximum repayment period.

After the economic and regulatory reforms were made, 3 distinct phases in the growth of retail assets have been observed.

a) Acceleration Period (1996-97 to 2005-06)

b) Deceleration Period (2006-07 to 2009-10)

c) Moderation Period (2010-11 onwards)


The table below shows the variation in retail credit from Mar’96 to Mar’10. The total SCB’s credit by bank groups in India for Personal loans has been given in Rs. Crores.

Rscrores

Mar’96

Mar'97

Mar'98

Mar'99

Mar'00

Mar'01

Mar'02

Mar'03

Mar'04

Mar'05

Mar'06

Mar'07

Mar'08

Mar'09

Mar'10

Personal loans

23628

28201

34752

39589

51638

65940

82518

113941

179087

255981

353225

433562

485415

553546

558894

%growth


19%

23%

14%

30%

28%

25%

38%

57%

43%

38%

23%

12%

14%

5%

(Source – CMIE Database, Economic Intelligence Service )

As we can see from the data, the growth in retail credit experienced a surge during the acceleration phase and then mellowed down until Mar’2010. At present, all banks are in the moderation phase and are maintaining around 20% Y-O-Ygrowth in retail assets

The graph below shows the various stages of growth in retail credit from 1997 to 2011


(Source – CMIE Database, Economic Intelligence Service )

Acceleration Period:

The acceleration phase can be considered from Mar’97 to Mar’06. During this period, retail credit grew at an average annual growth rate of 28.4% against 19.5% growth of the overall bank credit. The key characteristics of this phase can be enlisted below as:

a) Low risk perception of banks

b) Deregulation and increased autonomy

c) Competition

d) Liquidity in market due to positive economic indicators

During this period, the share of retail loan to total bank loan went up from almost nil to around 25%. The table below shows the growth of housing loan and loans for consumer durables during this phase.

(Figures in Rs Crore)

Mar'96

Mar'97

Mar'98

Mar'99

Mar'00

Mar'01

Mar'02

Mar'03

Mar'04

Mar'05

Mar'06

Consumer durables loans

881

974

1322

1906

2781

3463

3214

3221

4203

6349

6715

Housing Loans

7114

7946

9632

12377

18525

25412

32826

49067

85346

126797

182167

(Source – CMIE Database, Economic Intelligence Service )

It is also worth observing that during this phase, the percentage contribution of housing loans to total retail loans increased from 37.3% in Mar’93 to 51.6% in Mar’06. Moreover, the share of foreign banks also increased from 8% in 1996 to around 20% in 2006. This was primarily due to the growth story of India during this period.

Deceleration Period:

Tis period lasted for around 3 years from Mar’07 to Mar’10. During this period, there was a slowdown in retail credit and the annual growth rate of retail credit was only 4-5% in 2010. The growth rate of bank credit was much higher than the retail credit resulting in reduced share of retail to total loans. The graph below highlights the number of personal loan accounts (outstanding) that were present in the bank groups from 1997 to 2010. This shows that the slowdown began in 2005 itself and dropped to abysmal levels by 2010.


(Source – CMIE Database, Economic Intelligence Service)

Although the growth drivers like GDP growth rate, expansion in size of middle class etc. were present and active, the sole reason for deceleration was supply-side factors. The banks decided to go slow owing to the increasing trend of NPAs in their retail portfolios.

Moderation –

During this phase, the growth of retail loans has been more or less similar to that of bank credit. The present share of retail assets is expected to remain more or less at 20-21%. Most banks have also reduced the contribution of housing loans in their loan portfolio. For example, the chart below shows that from a share of 52.8% in 2007, the overall share is now at around 49.4% in 2010.


(Source – CMIE Database, Economic Intelligence Service )

Moderation was largely attributable to low interest rate or so called highly debatable ‘teaser rates’ until the first half of 2010.

In order for the banks to provide banking services to retail customers in a profitable manner, banks should follow an appropriate retail strategy. The essential components of a profitable and sustainable strategy are inclusive retail banking, responsible banking, customer centric banking, credit quality and risk-free source of income from retail banking.

Inclusive retail banking

Inclusive banking strategy (providing basic banking services including credit to financially excluded sections of the society) has several advantages largely to the banks themselves, apart from ensuring basic banking facilities to vulnerable sections of the society.

Infosys has launched its core banking solution Finacle which provides solutions to around 65% of Indian banks is guiding them to tap a mass of underprivileged Indians hitherto considered too poor to have a bank account (Economic Times, Feb 8, 2010)

Responsible Retail Banking

Banks must comply with prudent practices in assessing the credit worthiness and repayment capacity of the borrowers using Credit counselling

Yes Bank operates in a sustainability zone where wider economic, environmental and social objectives are met by supporting new emerging businesses that not only promote financial growth but also enhance social and environmental causes.  (Source – Yes Bank Website)


Customer Centric Retail Banking

Service quality in retail banking is a critical factor to customer satisfaction which aid in customer retention. Customer complaint redressal systems have to be robust and should be handled carefully.

Credit Quality in Retail Banking

Though retail banking is less risky, there is a possibility that poor credit quality can result in a high percentage of NPA’s. The Credit Information Bureau (India) Limited, incorporated in 2000, has played an important role in sensitising Indian retail lenders to the need and benefits of timely credit information. The government too has acknowledged the importance of strong credit information infrastructure as evidenced by the enactment of the Credit Information Companies Act 2005 (CIC Act), which seeks to provide a comprehensive regulatory framework for credit bureaus in India. This will help improve credit quality to a good extent. In addition, sensitizing the loan officers about possible risks associated with products will help the bank greatly

`Risk-free Source of Income from Retail Banking

Fee-based income from third party products helps the bank to increase return on capital/assets without increasing capital/assets. By providing bancassurance, they can also earn commission so that retail banking business turns out to be highly profitable.

This article has been authored by Aditya Maira & Mudit Kalra from IIM Indore.

Image: FreeDigitalPhotos.net


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