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Is there a reason to worry about the higher contributio... - 4/24/2018 3:13:32 AM   
priyapatel

 

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Is there a reason to worry about the higher contribution of retail loans in the economy?

No reason to worry about the higher contribution of retail loans in the economy

Retail loans now account for around 25 percent of all non-food credit. As youngsters join the work-force, the higher contribution of retail loans is expected.

The main reason private sector banks could weather the bad loan storm was that they were more focused on lending to the retail sector. Retail loans have two advantages. One, the margins are much better than those of corporate loans despite the despite the higher cost of disbursing them. Also, given the smaller size of the loans, a few of them turning bad does not dent the overall loan book.

A comparison of the loan books of HDFC Bank, the leader in private sector banks and SBI, the largest public sector bank drives home the point. Retail loans account for roughly 70 percent mark of HDFC Bank’s loan book, while the corresponding number for SBI is around 27 percent. Net interest margin of HDFC Bank stands at 4.3 percent while that of SBI is 2.45 percent. While the difference is glaring one needs to keep in mind that public sector banks are ‘compelled’ to lend to social sectors which are not the case with their private sector peers.

However, public sector banks have woken up to the changing trend and have started focusing on the retail lending. Take the case of SBI, where the bank has shifted gears both in corporate lending and retail lending. While it has shifted to the reverse gear in corporate lending with a negative growth rate of 4.2 percent, it has shifted to a higher gear in retail lending, growing it at a rate of 13.6 percent, the highest growth rate among all its business segments.

Overall lending numbers also point towards the growing bias. Lending to personal loans, including housing, vehicle, consumer durables, and credit cards, increased by 20.4 percent in February 2018. In contrast, advances in all form of industry (large and small) were up by only 1 percent.

Retail loans now account for around 25 percent of all non-food credit. As youngsters join the work-force, the higher contribution of retail loans is expected. Further, the slowdown in corporate loan growth is also increasing the market share of retail loans.

Perhaps, realizing the damage that high personal loans can do to the banking system and the economy, the central bank has raised the red flag. Reserve Bank of India’s deputy governor, NS Vishwanathan, warned that the herd mentality among bankers to grow retail credit and the personal loan segment in view of the problem-riddled corporate loan book is also risky.

“This is not a risk-free segment and banks should not see it as the grand panacea for their problem-riddled corporate loan book. There are risks here too that should be properly assessed, priced and mitigated,” said Vishwanathan.

RBI, however, is only partly right when it comes to risks associated with retail loans. In secured loans like housing, the non-performing loans are less than 2 percent. It is only recently that non-performing loans in the housing sector have moved up, that too in the affordable housing sector. However, a closer look at these toxic loans shows that most of them were given to owners of small businesses who were affected by demonetization and GST implementation. Besides these, delinquencies in housing loans are low.

Housing loan is in any case, not so much of a problem as they are asset-backed that too by an asset which does not fall much, if at all.

However, the auto loans and more importantly the personal loan segments, education loans, and credit cards are one the ones that are problematic. In case of personal loans, generally banks clear the file only in case of working employees that too for those who work in reputed companies.

As for credit card, banks know the risk they are taking and cover the risk by charging exorbitant rates to its users.

The biggest problem that the retail segment might face is in the educational loan segment, especially if the economy slows down. The US too is now facing the problem of high educational loans where the students are unable to repay the loans on account of lack of well-paying jobs or no suitable job at all. Going forward it is possible that banks in India might tighten the screening process of giving loans to only the more deserving students in India.

Though retail loans now account for 25 percent of all credit they are still no reason to worry. They are fragmented in nature and only in case of a big depression we can see the defaults rising. It is too early to raise the red flag on the inherent risk in these loans. On the other hand banks not lending to the industry is a more worrying sign as this risk can percolate down to the personal loan segment.


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