The Hindu Business Line : Large retail exposure may impact banks' asset quality

It said the increase in retail loans may impinge on bank credit for investment activities, thereby affecting economic growth. It will also increase indebtedness of households, which have implications for sustainability of private consumption and saving in the medium to longer horizon.

The large retail exposure may also impact on the banks' asset quality. Several cross section studies suggest that retail lending may pose various risks.

Retail lending, as a key profit driver for banks, has been behind the growing retail portfolio of banks, which constituted 21.5 per cent of total outstanding advances as on March 2004. The housing loans which form 48 per cent of total retail portfolio, had the least gross impairment at 1.9 per cent while consumer durables segment had the highest gross asset impairment at 6.3 per cent, said the report.

The RBI had put in place risk containment measures in its mid-term review of annual policy, 2004-05; and had increased the risk weight from 100 per cent to 125 per cent in the case of consumer credit, including personal loans and credit cards.

According to RBI, several factors influenced banks' lending to retail sector in India apart from diversification objective. These reasons relate to falling interest rates, fiscal incentives from the Government, various reform measures pertaining to the Securitisation Act, the repealing of Urban Land Ceiling Act and the rationalisation of stamp duty structure.

Additional factors influencing retail sector lending were low default rate, low credit offtake from the commercial and corporate sectors, lowering of costs of housing, consumer durables and automobiles due to competition, and technological innovations relating to increasing use of credit and debit cards, ATMs, direct debits and phone banking.

The retail thrust has become synonymous with mainstream banking for many banks over the last few years, said RBI in the report. While, new generation private sector banks have invested in creating and sustaining a retail brand, the public sector banks have also increasingly become active in retail loan area, the report added.

While ICICI Bank accounts for nearly 30 per cent of the domestic retail growth, State Bank of India's retail segment constitutes 20 per cent of its total advances. As per the report, in 2003-04 retail lending of SBI grew by Rs 8,803 crore against an increase of Rs 6,641 crore in 2002-03.

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