Retail banking | Opportunity lies in technology

Retail banking | Opportunity lies in technology

Mumbai: Anurag Thakur is a changed man. Gone are the days of late-night parties, dinners in fancy restaurants and holidays twice a year. Reason? He cannot borrow as freely as he could three years ago.

Thakur had to surrender three of his four credit cards and pay off his outstanding by breaking into his lifetime savings. He has decided to give up some pleasures now than go through the cycle again.

Thakur’s case typifies the change in the attitudes of Indian banks since the peak of the economic boom in 2007. They no longer offer free credit cards and personal loans on demand. They avoid exposure to unsecured loans, and when they lend, they ensure the borrower is a customer whose cash flow they can track. There is unanimity, however, in the vast opportunity for banking services in a country where only 40% of the population has a bank account.

Retail opportunity

ICICI Bank Ltd was the first to see the vast opportunity in retail banking in the early part of the last decade, treating it as a means to create assets than just raise cheap deposits like its public sector counterparts.

The nation’s largest private lender started offering loans to individuals as well as mortgages, even overtaking Housing Development Finance Corp. Ltd (HDFC) at one point.

The result was an exponential growth in the bank’s retail book, from 1% of its balance sheet in 2000 to 67% in 2006.

Indeed, ICICI Bank rose to become the country’s most valuable bank by market capitalization, riding on a 25% rise in annual profits during that phase. Its success forced public sector rivals, including State Bank of India (SBI), the country’s largest lender, to shed their inhibitions and woo individual borrowers.

SBI under former chairman O.P. Bhatt launched a special home loan scheme in 2009 that allowed borrowers to pay a low rate of interest in the first three years, after which the rates would become market-related.

The scheme helped SBI disburse about 37,000 crore of loans to up to 500,000 customers in the last two years, challenging the domination of HDFC and ICICI Bank, forcing them to launch similar schemes.

The Reserve Bank of India (RBI) felt such loans were risky for banks and increased provisioning on these to 2%, against 0.4% for normal home loans. This led to a brief confrontation between the banking regulator and the former SBI chairman, with Bhatt arguing that these loans did not carry any extra risk and the bank takes into account a borrower’s paying capacity before lending. SBI withdrew the scheme after Pratip Chaudhuri took over as chairman in April.

The aggressive scheme underscored an important point of the last decade—that times had changed and even public sector banks were not shy of competition. This, in turn, meant banks were falling over each other to offer free credit cards and launch new monthly repayment schemes for individuals to buy electronic durables or even for personal loans.

Not surprisingly, banks sacrificed prudence for profits. This has resulted in an increase in bad assets and forced many like ICICI Bank to cut their exposure to individuals. Since 2008, even foreign banks such as Hongkong and Shanghai Banking Corp. Ltd (HSBC), Citibank NA and Barclays Plc have either cut their loan exposure to individuals or abandoned the business.

Banks also aggressively employed recovery agents who would often harass customers to repay loans. The practice stopped after a public outcry forced RBI to intervene and issue guidelines on loan recovery.

Perhaps an accurate indicator of the declining interest of bankers in offering risky personal loans is a set of RBI data that shows credit card loans outstanding has consistently fallen, from 28,000 crore in March 2009 to 20,145 crore in March 2010 and to 18,098 crore this March.

The number of credit cards in use fell to 17.65 million in June from a peak of 27.54 million in 2007-08, as banks are more careful in selling new cards and more open to cancelling existing ones.

Even foreign banks, the pioneers of the credit card and personal loan businesses, are turning away from the market. In April, Deutsche Bank AG sold its credit card business with 200,000 customers to IndusInd Bank Ltd for an undisclosed sum.

The UK’s Barclays Bank is seeking buyers for its Indian credit card business, having suffered losses since its launch in 2007.

HSBC is also making losses in retail banking in India. In the first half of 2011, it made a loss of $4 million against a loss of $49 million in the first half of 2010.

HSBC’s India chief executive Stuart Davis said the bank continues to be cautious on the retail book after bad loans rose in the past couple of years. “We will grow the book in a controlled and calibrated manner. We will be cautious in the second half and focus on customers we have, for demand," Davis said.

CitiFinancial Consumer Finance India Ltd, the retail lending arm of Citibank, also reeled under losses as bad loans from unsecured personal loans have mounted since 2007, though the company returned to profit in fiscal 2011 from a 458 crore loss in the previous year.

But the losses forced the management to cut the bank’s branch network from a peak of 450 to 118 as well as trim staff. The company is looking for a buyer and is being managed “for value", according to Citigroup.

The pullback

The bad experience with retail lending forced banks to move away from unsecured loans towards more secure transactions such as home loans and auto loans. Home loans and auto loans are considered secure transactions because a bank can always take recourse to selling the asset (a home or a car) if the borrower defaults on the loan.

ICICI Bank is now giving retail loans only to customers who have a long relationship with the bank. It posted a loss of 84.14 crore in the April-June quarter in its retail business, against a 217.33 crore loss a year earlier.

At a quarterly earnings call with the media in July, Chanda Kochhar, managing director and chief executive of ICICI Bank, said unsecured loans made up 2.1% of total advances, down from 3% last year.

A.S.V. Krishnan, analyst at Ambit Capital Pvt. Ltd, said banks will be more innovative, change how they distribute products and look at tie-ups or different product categories.

“Just like banks have tied up with vehicle finance companies, they could also tie up with business schools, for example, to give education loans. This will help in keeping a tab on students even after they have left college because many times the first job is through campus placements," he said.

Rising interest rates have made bankers wary about a possible increase in non-performing loans in the near future. Interest rates have been on the rise with RBI raising its key policy rate 12 times since March 2010, from 3.25% to 8.25%, to fight persistently high inflation. Banks and housing finance firms have raised loan rates by at least 200 basis points, or 2 percentage points, in the past year.

Bad loans

Rising bad loans in sectors like education are worrying bankers. Bad education loans rose by 45% in fiscal 2011 to around 1,600 crore, out of total educational loans of 43,000 crore.

There is still scope for banks to increase exposure to auto loans, personal loans and credit cards, said Rajeev Mehta, research analyst at financial services firm India Infoline Ltd.

“Banks who lost money in retail did so because of their own standards. There were also exceptions like HDFC Bank, which has gradually increased its exposure in that segment," he said. “Currently, the high rates and a pickup in economic activity has meant that banks are focusing more on their deposit profile, but that is just a transition."

HDFC Bank Ltd has been an exception among Indian banks, aggressively disbursing retail loans, particularly for feeding demand from rural markets. It disbursed on an average about 5,000 crore every month this fiscal year to finance personal loans, commercial vehicles, auto and two-wheeler loans.

Krishnan of Ambit said banks will be keen to tap into rural demand. “There has been a boom in the urban areas in terms of individual credit in the last six-seven years, but rural penetration, where more than half of the country’s population resides, is low. So logically, that boom, whenever it starts, is likely to last much longer," he said.

Indeed, 70% of the rural population lives in under-banked areas. According to RBI, of the 600,000 habitations in the country, only 5% or 30,000 have access to a bank branch.

In the last few years, RBI has pushed banks to open more branches in rural areas. In fact, banks can open a branch without RBI’s permission in areas where no banks exist.

Last month, RBI opened a possibility that industrial houses will be allowed to set up banks, releasing draft norms on new bank licences. One condition for giving the new licences is that every fourth branch a new bank opens must be in rural areas.

RBI has invited suggestions and comments on the proposal till 31 October.

The future

But analysts say the future of Indian banking is beyond bricks and mortar branches and towards technologies such as mobile phones.

The opportunity for retail lending is still there as India lags many of its developing counterparts in terms of availability of credit. For example, a severe shortage of home units and a low mortgage to GDP (gross domestic product) ratio means there is almost an infinite opportunity for mortgage loans in the country.

India’s mortgage to GDP ratio at 9% lags counterparts like Thailand, South Korea and Indonesia, who have ratios of 15-25%, and is much lower than the US’ 86% and Denmark’s 100%, according to HDFC.

Thakur is planning to get married and wants to buy a house in the next couple of years, for which he has approached a couple of banks. Like him, there are billions of others who will look to take loans to build homes.

Bankers in India are betting on this favourable demographic and an expected continuing in economic growth to throw up opportunities.