Retail Loans: The Major Concern for banking industry

Bankers anticipate a rise in bad loans, especially in the retail segment after the latest bout of interest-rate tightening. Senior bankers are bracing for higher delinquencies in the personal and consumer loan portfolio of banks besides credit cards, as the impact of higher interest rates start to bite. The burden of repayment is expected to hurt those who have taken small-ticket loans.

Recently, credit rating agency Crisil had warned of a rise in delinquencies in the retail portfolio of banks, with rising interest rates. Higher rates could lead to a slowdown in lending. It is too early to comment on whether interest rates have peaked and may taper off in the near term, rising interest rates will certainly impact the growth of the lending business, but may not impact the quality of credit. Credit is expected to grow by 15% this year, of which, retail loans are expected to rise only by 5-10%. However, corporate credit will continue to grow at a significant pace.

The Indian economy would grow at 7.5-8%, which is still quite robust compared with other countries. Not only this, such a growth rate is sustainable for Indian economy and there is an opportunity for this to rise further. The first lot of delinquencies may be felt in the unsecured loans portfolio, including credit cards, personal loans and consumer durable finance. It may be seen in mortgage loans and loans given to small-and-medium enterprises in the next phase.

The other issue worrying bankers now is the possibility of a single-borrower defaulting across multiple banks. Higher interest rates are causing individuals to borrow from several lenders at the same time and there is a high possibility of them defaulting too. The next 8-12 months may see this phenomenon rising, especially in the personal loan segment.

According to a recent report by credit rating major Crisil, the asset quality of retail loans extended by commercial banks in the country is set to deteriorate. The report said that bad loans, or non-performing assets (NPAs) in retail loans will rise to 4% of the total loans over the next two years, from 2.7% as of March 2007.

The increasing exposure to higher-risk customers is mainly through personal loans and credit card receivables, it has said. These are unsecured in nature and now form 17% of the total outstanding retail loans in March 2007, up from 6% in 2004. Housing loans constitute over half of the total retail loans in India. Bad loans in home loan portfolio increased to 2.2% of the total loans in March 2007, from 1.8% in 2005. These are expected to increase to 2.7% in the financial year 2008-09.

Car and commercial vehicle asset segments comprise one-third of the total retail loans. Crisil estimates that gross NPAs in these segments have increased to 2.3% and 4%, respectively, as of March 2007, from 0.9% and 3.2%, respectively, in 2005. In 2008-09, these numbers are seen at 3% for car loans and 5.5% for commercial vehicles. The slowdown in recovery efforts, following the controversy over recovery methods of some players, resulted in a sharp spike in delinquencies during September-October 2007.

Contributed By:
Arjun Pal
(Knowledge Cell - Globsyn Business School)