Retail race

It is not altogether surprising that Indian banks, after burning their fingers on project loans to some of the largest industrial groups, should turn to borrowers at the other end of the spectrum to drive their growth. A BusinessLine analysis shows that unsecured credit card debt and personal loans have become the fastest growing segments for banks in the last three years, expanding at a 30-31 per cent annually while system credit has increased at just 8-9 per cent. While unsecured retail loans are certainly not at alarming levels yet, making up less than 8 per cent of outstanding bank credit, their scorching growth rates do warrant attention from bank risk managers and the regulator. Indian banks have had a bitter experience with indiscriminate retail lending during the previous boom. In the event of defaults, such loans offer negligible prospects for recovery.

This shift in bank lending has no doubt served a felt need for the economy. In recent years, private consumption has been the key engine of India’s growth with private capex in the doldrums. Given that India is still a lower middle-income country, retail access to credit is imperative to sustain the consumption juggernaut. Banks too are keen to push unsecured loans because they allow them to showcase strong credit growth while earning a return on assets as high as 3-4 per cent. There has been a quantum improvement in the quality of data backing credit card and personal lending in this economic cycle, compared to the previous one which went bust in 2008-09. With the advent of credit bureaus, data repositories on credit history and social media analytics, lenders today have the wherewithal to put their retail borrowers under a microscope to extend loans only to prime ones. But with multiple lenders — universal banks, small finance banks, NBFCs and microfinance institutions — now chasing the same retail segment, the question really is if cut-throat competition will force a dilution of credit standards, lead to poor risk pricing and trigger a race to the bottom.

To ensure that they do not end up with the short end of the stick in this rat race, public sector banks may need to beef up the pace of technology adoption and build capacity in alternative credit scoring and data analytics. Acquiring retail exposures indirectly through securitisation or assignment deals with NBFCs or small finance banks is another option. Traditionally, such niche lenders have managed low credit costs by concentrating in areas where they have last-mile reach, hiring local staff and leveraging on local communities to ensure good credit behaviour. But they have still proved vulnerable to liquidity risks and exogenous shocks, suffering a sharp spike in defaults during the economic downturn and the note ban months. Banks must thus be conservative with their exposure limits to unsecured retail loans, no matter how attractive their growth rates or yields may seem right now.

COMMENT NOW