NPA-hit banks find new love in middle class and it may revive Indian economy

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In 1985, a survey by the government supported think tank NCAER estimated that the size of the Indian middle class, which had a promising potential to spend on consumer goods, was bigger than the US economy then. This report attracted the attention of global consumer goods companies.

With the progressive opening of the economy, India’s growth story has become consumption-driven and more than 25 years since the liberalisation in 1991, the Indian consumer has gone a step further and does not hesitate to borrow to meet its consumption aspirations. This trend in consumer behaviour has resulted in an opportunity for banks to lend outside their traditional constituency — businesses and large corporates.

In the last four years, with corporate lending becoming unviable due to the rise in defaults and losses, the push toward retail lending has become even stronger. An international comparison shows that India’s retailisation of bank credit is the lowest among peers. Household credit as a percentage of GDP was 11.2% as of June ’18, compared with the average of 36% in emerging economies and 72% for advanced markets. But India may have to look internally to justify the surge in retail loans.

Any loan by an individual impacts his savings and, hence, local money available for investments. Over the 10 years since the global crisis, fresh financial savings of Indian households have more than doubled. But their net financial liabilities have risen at double that pace, leaving less for investments. This means India may have to rely on overseas money to fund growth.

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“Our medium-term challenge is to raise our savings rate because we do not want to reduce our investment rate,” says Pranjul Bhandari, chief India economist at HSBC. India’s current account deficit, which is vulnerable to global oil prices, is at 2.9% of GDP. Still, even corporate-focused banks are keen on retail loans.

“Retail will be a dominant focus for us because our market share is fairly small. For example, our market share in auto loans is just 3.3%, so there is clearly an opportunity to further grow and it is not because of the absence of a customer,” said PS Jayakumar, MD and CEO, Bank of Baroda, the state-run lender that is known for its corporate focus.

“As we put better processes and analytics in place and become much more communicative, there is no reason why we should not do more.” Over the past few years, there has been a structural shift in banks’ loan books. The share of the retail portfolio has risen from 18.3% in 2013 to 24.8% in March 2018 and the latest data for October put this share at 25.5%.

For the country’s three largest lenders — State Bank of India, HDFC BankNSE -0.08 % and ICICI BankNSE 0.68 % — retail accounts for more than half of their loan books. Even for some private banks like Axis Bank and Kotak Mahindra Bank, retail accounts for almost half of their loan books.

What is driving the retail push in the last four years is a combination of factors. Banks have turned cautious on their traditional constituency. Also, lending to retail has now become somewhat safer as banks are heavily relying on credit bureaus that help them with the credit history of borrowers and also help assess default risks.

“As consumer bureaus are developing, people are realising if you default, you won’t get loans further. That is a good improvement,” said Aditya Puri, MD and CEO, HDFC Bank. Another factor that has brought about a growth in the retail loan book is that more people, especially those below 40, are now coming to banks and shifting from informal channels, particularly in the hinterland.

A study by credit bureau TransUnionCibil notes that millennial and Generation X consumers are driving much of this growth and comprise well over half of all retail accounts and balances. “It is (also) more to do with the fact that financial inclusion has expanded with Jan Dhan accounts, etc, and we are going to see more of that,” said Jayakumar.

Also, semi-urban and rural India’s GDP distribution has changed over the last 8-10 years. “There is tremendous amount of selfemployment. There is a change, which we are betting on,” said Puri.

The use of technology has also helped deepen the customer reach for banks. HDFC Bank is using virtual robots to substitute repetitive functions and save time. “We will distribute digitally. We are giving loans in 10 seconds. It delights customers and changes my cost dynamics,” says Puri.

The bank’s personal loans are done in 10 seconds and 50-60% credit cards are done within 10 seconds. In semi-urban and rural areas, all its products are available in feature phone in 11 languages. Most retail loan products, excluding home loans, earn banks a wider margin compared to corporate loans.

“The rate of interest on unsecured loans will be more than what you lend to Levers (Hindustan Levers),” says Puri. Besides, bad loans are also now lower than 3%, which has given banks more confidence to focus on retail. “We expect our retail portfolio to constitute 60% of loans by the end of this fiscal because the corporate demand is still very-very muted,” says PK Gupta, managing director (retail & digital banking), State Bank of India.

But it is not picture perfect for banks. Delinquency rates increased year-overyear for both home loans and credit cards by 22 and 28 basis points, respectively, to 1.73% and 1.78%, according to a study by credit bureau TransUnionCibil.

In case of loans against property, it increased 73 bps year-over-year to 3.03% in CYQ3 2018. “Lenders must judiciously monitor their risk management processes,” says Yogendra Singh, vice president of research and consulting for TransUnion CIBIL. He cites the example of loan against property.

At the same time, delinquency rates for these loans have now crossed 3% for the first time in several years. “Lenders must now determine if the rapid demand for these loans, which are an excellent revenue generator, outweighs the recent delinquency increases,” said Singh.