Mumbai: Ritika Arora, a 27-year-old public relations professional, had been planning to buy a new car this festive season after her family’s old vehicle was stolen in August. After scouting around for a bank loan through the nine-day Navratri festival, she decided to wait for a few months more.

“I was planning on buying a sedan for my father on Dusshera day, but the loan rates I saw were way too high. I’ll probably check the rates during the new year again," Arora said.

The reluctance of consumers such as Arora to borrow has meant lacklustre demand for bank retail credit in the early part of the festive season that peaks with Diwali on 23 October. That’s in contrast with a sharp rise in online festive shopping.

The weak demand for retail credit is an offshoot of two years of sub-5% economic growth and persistent inflation that has eroded the spending power of consumers, bankers said.

The turnaround in sentiment following the rise to power of the Bharatiya Janata Party after the general election hasn’t yet boosted consumer confidence.

Punjab National Bank (PNB), as part of its festive season offer, cut interest rates on home and auto loans in September. It is offering home loans up to 2 crore at 10.25%, which is also the bank’s base rate. For home loans above 2 crore, the rate is 10.5%

The bank has slashed the interest rate on two-wheeler loans by 1.5 percentage points to 12.25%, while introducing a new category of borrowers with a high credit rating who will be offered a floating rate of 10.5% on car loans.

Despite such offers, the bank expects only 10-12% growth this festive season in auto and consumer durable loans, down from 20-25% as compared with the same period last year, said Ram Sangapure, executive director at PNB.

“The spillover of the slowdown from previous years has now begun hitting the customer segments," he said, adding that despite offering discounts similar to last year’s, the response has not been very encouraging.

Non-food credit for the fortnight ended on 19 September stood at 60,241,455 crore, up 9.78% from 55,02,864 crore a year ago, as per data provided by the Reserve Bank of India (RBI).

It was the second consecutive fortnight that the credit growth had been below 10%. In comparison, deposits during the fortnight stood at 81,06,633 crore, up 13.37% from 71,50,374 crore in the previous year.

Like other segments, credit demand for the retail segment has also been slowing. As per RBI’s monthly data, retail credit grew by 12.8% year-on-year as on 31 August and stood at 10,79,200 crore as compared with 9,56,400 crore a year ago—lower than the 17.8% growth noticed in the same period a year ago.

However, consumer response to online sales, for which consumers use debit or credit cards or pay cash on delivery, has been robust. E-marketplaces like Flipkart, Snapdeal and Amazon reported record sales on 6 October.

“So far in October, credit card spends have gone up by about 40% from the same period last year. A large part of the spends have come from online retailers. October has typically been a good month for these transactions," said Sumit Bali, executive vice president at Kotak Mahindra Bank Ltd.

Banks are encouraging customers to spend more via debit and credit cards. ICICI Bank Ltd is offering to convert large value transactions on customers’ debit card into equated monthly instalments (EMIs), apart from a sedan to the customer who spends the highest amount via credit or debt cards between 26 September and 25 October.

Another private sector lender, Federal Bank is offering 10% cashback for customers who purchase Samsung mobile phones and tablets using the bank’s debit card.

In August, State Bank of India (SBI), the nation’s largest lender, cut interest rates on home loans to 10.15% for all loan brackets. For women borrowers, the interest rate for all home loans will be a uniform 10.1%, it said. Earlier, SBI charged 10.15% for loans up to 75 lakh and 10.3% for loans above 75 lakh. For women borrowers, rates were 10.1% and 10.25%, respectively.

For SBI, the festive season has started on a strong note. The bank has seen a 30% rise in its car loan portfolio in 2014, from that in 2012. In 2013, the bank raised its barrier for car loan borrowers to people having an annual salary of 6 lakh, from 2.5 lakh earlier, and so figures for 2013 and 2014 are not comparable, said B. Sriram, managing director and group executive (national banking). Sriram says SBI’s strong growth in the auto loan segment is due to the bank’s stronger focus on it and the way it has mapped dealerships in the country.

“It is difficult to assess what is happening in the consumer durable segment right now because a number of customers convert their credit card spends to personal loans going ahead, as it gives them a better deal," Sriram said on the weakness in retail loan demand being reported in that segment by some lenders.

Another reason for the tepid demand could be the timing of the festivals this year.

“The consumer durable industry growth could be lower at 10-12% this festive, compared with last year because Diwali and Dussera, which are two big draw festivals, fall in the same calendar month of October, meaning within one salary cycle, as compared to two separate salary cycles last year," said V. Vaidyanathan, chairman, Capital First Group, which provides financial services across consumer and wholesale businesses.

Vaidyanathan expects things to improve during the rest of the year, as consumer sentiment is slowly improving and fuel prices are coming down.

Ramesh Iyer, managing director at Mahindra and Mahindra Financial Services Ltd (MMFS), conceded that higher interest rates and elevated costs are affecting buyers’ decisions. Still, even though the festive demand for loans has been flat so far in the festive season, things should improve by Diwali, he said.

Analysts, too, are waiting for Diwali to size up festive loan demand. “It is too early to take a call whether the growth has been strong or weak. A clearer picture will emerge only by Diwali which is at the end of this month," says Saikiran Pulavarthi, banking analyst at Espirito Santo Securities Research.

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