Not sub-prime, but retail lending on rise: Assocham

Not sub-prime, but retail lending on rise: Assocham

New Delhi: Though the Indian financial sector does not have a sub-prime market, retail lending has increased by over 30% year on year between March 2006 - 07, underscoring need for caution.

According to Assocham’s Eco Pulse (AEP) Study onRetail Lending’, ICICI Bank’s retail advances increased by 39% as on 31March, 2007, which constituted 65% of advances.

Bank performances

* Centurion Bank of Punjab (CBoP) focused on growth of retail business, thus, its retail loans account for 68% of net advances.

* Punjab National Bank’s retail credit constitutes 22.7% of its net credit.

* Retail loans of State Bank of India, one of the largest Banks in India constitutes 21.50% of its total loan book.

“In the backdrop of increased focus on retail strategy and volatility of the financial markets, Indian banks need to be more cautious while making disbursements in the retail sector. They would do well to closely monitor their personal loan portfolios," said Venugopal Dhoot, president, Assocham.

Rising competition has seen over leveraging of customers, which along with rising rates may cause a rise in delinquencies. Even though this market is nascent, it’s one of the fastest-growing loan segments.

No sub-prime market in India

Unlike in the US, there is no sub-prime market in India. The US sub-prime market consisted primarily of people with little or no credit worthiness, most of them charged to sub-prime borrowers being mortgage loans.

In India, the lower end of the personal loan market may be considered as a segment carrying some of the risks attached to the sub-prime.

Most customers in India are first-time borrowers from the organized market, and hence, have no credit history.

Findings of the AEP study

* Big personal loans with an average size of around 90,000 are given to more established individuals at lower rates of 14-28% against the 30-55% level.

* Competition in personal loans market increased with the entry of multinationals, private banks and NBFCs.

* Citi Financial and GE Money are the oldest players in this market.

* Companies like ABN Amro, CBoP, HDFC Bank, HSBC, ICICI Bank, DBS Cholamandalam, Fullerton India and Religare have been increasingly focusing on personal loans.

* Sub-prime market for these players lies between 5-20% of monthly disbursements.

* Citi Financial and Fullerton go through personal screening of customers but this is not a practice that is followed by everyone.

* Even though, India is not exposed to sub-prime lending, likely recession in US market may affect entire world economy. Indian stock market is showing a downward trend in line with global markets as prices of Indian shares, corporate bonds and real estate are decreasing.

* Most commercial banks have focused on retail lending by registering an increase of about 32% with subsequent reduction of 13.75% in their NPAs on a y-o-y basis during FY 2006-07.

* Indian banks have significantly reduced their NPAs but sub-prime mortgage crisis in US might still be cause for concern in India.

* Among major commercial banks, CBOP topped the list in extending loans in the retail segment. It saw a huge growth (65%) in their retail business in FY 2006-07, followed by ICICI Bank (38.5%), Bank of India (35%), Dena Bank (33%), Allahabad Bank (29.3%) and HDFC Bank (22.9%).

US Sub-prime mortgage crisis

It began in late 2006, when thousands of borrowers defaulted in payments, as a result of which many lenders had to file for bankruptcy. This led to a direct impact on US housing market and economy as a whole.

Economists, including former Federal Reserve Board Chairman, Alan Greenspan, expressed concerns that “subprime mortgage crisis will impact housing industry and US economy.

Anticipated defaults on subprime mortgages and tighter lending standards can now combine to drive down home values, making homeowners feel less wealthy. This would contribute to a gradual decline in spending that weakens the economy.

Last year, 13.5% mortgages originating in US were sub-prime, according to Mortgage Bankers Association, compared to 2.6% in 2000. Overall, sub-prime market was $600 billion in 2006, 20% of $3 trillion mortgage market, according to Inside Mortgage Finance.

In 2001, sub-prime loans made up just 5.6% of mortgage dollars. By end 2006, sub-prime delinquencies more than 60 days late were almost 13% compared to 8% a year earlier.

With failures of high profile US financial firms working in the sub-prime mortgage market, credit risk premium on US corporate bond market rose sharply. Global investors are willing to take lower risk for getting same returns today and are now demanding higher premium in return for bearing risk, including that of stocks of emerging market economies like India.

Hence, we are witnessing lower prices for shares, corporate bonds, and real estate in the Indian markets.