Sunando Roy November 2005
Retail banking has always been prevalent in various forms ever since the evolution of banking. Co-operative banks that have been existence in India for over a century have always had retail thrust. It is only since the mid nineties that the term retail banking has been used as a means of reinforcing a conscious foray into this particular line of business. Retail banking today for many banks is synonymous with mainstream banking, with vast sums of money being invested in creating and sustaining a retail brand, further supported by requisite technological and staffing support. It is pertinent to ponder about the causes of the shift (or increase) of focus towards the retail side. There are several compelling reasons that have influenced this shift. They are:
- Fear of corporate defaults and NPA computation
- Relative safety implied by the mortgage loans
- Low credit off take during from the commercial and corporate sector during the period 2000-2003 (this trend has reversed, though, over the last year and a half)
- Lowering of cost of consumer durables and automobiles due to competition
- Increasing use of credit/debit cards as plastic money
- Automation of stock exchange operations, dematerialization
- ATMs, direct debit and phone banking as convenience factors
- Advisory services: real estate, investments and insurance.
Advances made by the commercial banking system as a whole increased significantly by 33% in 2004-05. Contrary to the trend observed in the last few years, the growth in advances far outstripped the growth in investments which was to the tune of 8%. While rising interest rates which was particularly evident in the G-sec yields, led the banks to unwind their investment positions, the increased pace of the growth in the industrial and services sector aided the credit buoyancy in no small measure. The most significant component of growth, however, was the banks retail portfolio.
Retail segment, which witnessed a frenetic growth over 2003-04 seemed to maintain their momentum in 2004-05. Retail advances in absolute terms have increased by Rs. 77,588 crore in 2004-05, and their share in the scheduled commercial banks’ total loans and advances increased from 22.0% as at 31st March 2004 to about 23.7% on 31st March 2005. Retail loans registered a growth of 41% as against a growth of 33% in the overall loans and advances of the banking system. Housing finance, logged a 50% growth in 2004-05. The other driver of retail loans was ‘Other Consumer Finance’ which comprises auto loans, loans to professionals and educational loans etc which recorded an impressive growth of 32.6% during last fiscal. The same trend continued in the first half of 2005-06 where the retail loans grew at an annualised rate of 39% as compared to a 22% annualised growth of the investments portfolio. The point to be noted is that while growth in corporate advances due to the growth momentum in the industrial sector is very impressive, retail story continues to hold good.
The overall impairment of the retail loan portfolio worked out to 2.8 % in March 2005 and compared quite favourably with Gross NPL ratio for the entire loan portfolio, which was 5.1%. Within the retail segment, the housing loans, which formed around 50% of total retail portfolio, had the least asset impairment at 1.9% while credit card receivables had very high impairment at 7.9% in March 2005. However, the disconcerting feature in the asset quality of retail portfolio is that while overall NPA level in the industry has been consistently coming down, NPAs on the retail side point to a contrary trend. Though the increase in the NPAs in the retail segment may not be very substantial as to warrant immediate concern, NPA levels in the retail segment are steadily inching up nevertheless. This points to the need to exercise caution by the banks in all aspects of retail loans administration.
Experiences in other countries show that any increase in real estate prices is generally preceded or accompanied by a boom in banking credit and/or expansionary monetary policy or easy liquidity conditions. A subsequent tightening and/or a collapse in the market prices may lead to increased credit risk. The relationship between the real estate prices and housing loans is required to be monitored closely. The long-term nature of the mortgage loans, coupled with very low interest rates, may also affect banks heavily if the interest rate goes up significantly. Further, increased competition may lead to adverse selection, which, in the event of a fall in the real estate prices may expose the banks to higher levels of risk. A significant amount of the personal loans could be non-collateralised and a source of potential vulnerability in the event of default. Recognising the inherent risks of the retail portfolio, RBI has increased the risk weights of housing loans against mortgage of houses from 50% to 75% and consumer loans including personal loans and credit card receivables from 100% to 125%.
Internationally, a view has been emerging that Loan-to-Value Ratio (LTV) being a dominant indicator of default probability of housing loans, loans with high LTV (say above 80%) could be assigned higher risk weight. The suggestion is based on empirical evidence from some countries. However, the likelihood of default and the gross severity of loss in the event of default are positively correlated with the LTV, only when all other factors are held equal. Therefore, a more risk sensitive capital allocation framework would suggest that LTV should be considered as the risk indicator of an individual loan in conjunction with overall credit quality which is a function of many aspects such as quality of credit appraisal, installment to income ratio, trends in prices of real estate, efficacy of foreclosure laws, purpose of purchasing/constructing a house i.e. whether as an investment or for living.
The penetration level in housing in India is still one of the lowest in the world. The mortgage to GDP ratio is around a measly 3%; this compares to 51% in the U.S and 12 to 20% in more economically comparable countries. This implies a potentially manifold increase in the existing level of mortgage in the country. Also, thanks to the affordability, there is an increasing trend with more and more customers opting to buy a house rather than renting one. According to a housing survey, if the present rate of growth of population continues, then by 2010 India would require 2.5 to 3 million additional dwelling units every year. What is even more noteworthy is the fact that unlike in the case of some developed countries like USA where housing boom has led to an unprecedented rise in property prices, India’s real estate market has by and large remained stable. Additional credit that has been flowing to the housing sector does not seem to have fuelled a disproportionate rise in property prices till now. This is a reassuring factor insofar as the banking sector is concerned as there is no imminent threat of an asset-price collapse in the Indian housing market in the event of an economic slowdown or the reversal of the investment cycle.
Corporate Loans
A significant feature of the macroeconomic developments in 2004-05 was the resurgence of the industrial sector which grew at 8.3%, propelled by buoyant exports and a brightening of the domestic investment climate in an environment of rising business optimism and consumer confidence. Industry contributed 26 per cent to overall growth of the economy, up from 17 per cent in 2003-04. Services sector also maintained its growth momentum and grew at 8.6% in 2004-05. Reflecting this uptrend, credit off-take from the banking system by commerce and industry has been very strong last fiscal. This year and the last stand in sharp contrast to the preceding two years. Overall, advances other than retail loans increased by a healthy 23% in 2004-05.
The growth in corporate loans, however, has been lower than the growth in retail loans. One reason could be the increase in non-bank sources of commercial finance. First, the role of mutual funds in providing commercial finance through subscription to commercial paper and debentures rose at a fast pace. Second, there has been increasing recourse to external sources by companies that have been tempted both by the lower offshore interest rates and the strength of the rupee against the US dollar, accounting in part for the increased inflow of capital into the country.
Leave a Reply