Comparatively lower risks and credit costs are prompting banks to boost their retail biz

Home and auto loan seekers might soon be able to borrow at relatively lower rates of interest.

The rising competition amongst public sector banks to shore up their retail portfolio is likely to drive down interest rates on such advances.

Hit hard by slowdown in credit demand from the corporate segment and the rise in stressed assets (from the sector), banks are looking to boost their retail portfolio, which includes home, auto, personal and education loans.

According to Saday Sinha, Vice-President, Equity Research, Kotak Securities, banks will look to bring down interest rates marginally to boost demand and grow their retail book.

State Bank of India, for instance, recently lowered lending rate across the board by cutting the base and prime lending rates by 25 basis points each to 9.75 per cent and 14.50 per cent, respectively. Besides, the bank also lowered its home loan rate to 10 per cent for loans up to Rs 30 lakh and 10.15 per cent for above Rs 30 lakh.

A host of other public sector banks have also lowered interest rates on retail advances as a part of their festival bonanza.

Lower rate of growth

While the average ticket size of retail advances is relatively lower than those extended to the corporate sector, banks seem to be comfortable lending to the retail segment due to the comparatively lower risks.

According to Sinha, by focusing on the retail sector, banks might have to settle for a lower growth rate in advances.

Banks have already revised their growth projections for this year to 15-16 per cent from the 18-20 per cent made during the beginning of this year.

However, banks prefer lending to the sector as the credit cost is lower on such advances due to relatively lower provisioning required for non-performing assets (NPAs).

Provision-coverage ratio refers to the ratio of outstanding provision to gross NPAs; higher provisioning depletes a bank’s bottomline.

“The asset quality in the retail segment has been better than in the agriculture, SME and large corporate segments. Naturally, the provisioning requirement for NPAs will also be lower, thereby helping banks improve their profitability,” Sinha said.

Margins

Currently, retail accounts for 16-20 per cent of public sector banks’ total advances.

Though lowering of interest rates on retail advances might put a pressure on margins, this will be offset by a corresponding reduction in interest rates on deposits, senior bank officials said.

“Fixed and bulk deposit rates are coming down, and so the cost of funds will start easing soon. The reduced yield on retail advances will be more than offset by the lowered cost of funds,” a senior official pointed out.

Moreover, most banks are sitting on surplus cash and it makes sense for them to lend these funds to the retail sector than invest in commercial paper or certificate of deposits which will earn them only 8.5-9 per cent.

Banks earn better margin on loans given to the retail sector. “Given the slowdown and the rise in stressed assets, banks prefer lending to AAA-rated corporates or big NBFCs which are safer. But here the rates are comparatively lower and so margins are squeezed,” said Deepak Narang, Executive Director, United Bank of India.

shobha.roy@thehindu.co.in

(This article was published on November 18, 2012)
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