Retail lending is back with a bang

Retail lending by the country's banks is back with a bang with nearly a 15-fold increase last year, if the RBI data areanything to go by.

The data show that banks have extended net loans of Rs 67,569 crore in the 12-month period ended November 19, 2010. In contrast, the retail lending tap was almost turned off with the figure during the same period in 2009 registering an incremental flow of only Rs 3,950 crore. The net loans show total bank lending net of repayments.

Festival frenzy

Festival season buying clearly prompted consumers to borrow more, as a full 30 per cent of the loans (Rs 20,500 crore) were disbursed in two months between September and November, 2010.

While private banks such as ICICI Bank and HDFC Bank have begun to push auto and home loans again, even public sector banks are setting up special cells to drive retail lending.

The recent spike in retail loans shows both a rising appetite on the part of consumers to borrow and the willingness of banks to lend.

Housing dominates

For banks, with deposit rates on the rise, a focus on the retail loan segment makes better business sense as a means of driving better yields between the cost of funds and the incomes earned on lending activities.

However, even as they step up focus on retail lending, banks are concentrating more on secured loans. Home loans made up almost half of the incremental loan growth this past year. Housing loans constituted around 51.5 per cent of the total retail portfolio as of November 2010, as against 44 per cent share it commanded in March 2008.

Education loans are another segment that witnessed high rate of growth and currently constitute 6.6 per cent of the total advances.

A moderation in the incidence of defaults (non-performing assets or NPAs) may also be another reason for banks re-entering this segment.

After the credit crisis of 2008, banks in general, led by private ones such as ICICI Bank, decided to refrain from retail lending after they faced an increase in defaults, especially on unsecured loans. Individuals, too, cut back on borrowings due to the economic slowdown.

As a result of these trends, the share of retail credit in total advances came down from 26 per cent in March 2007 to 18.8 per cent as of November 19, 2010, the RBI data show.

However, the trend appears to be now reversing as retail loans, after growing at 4.5 per cent compounded annually over the last two fiscals (2008-09 and 2009-10), have expanded by 12 per cent for the year ended November 2010.