Private banks eye distribution mode for retail loans

New private banks are contemplating forays into the secured retail loan market through distribution tie-ups, instead of launching their own products.

Analysts say the low base of core deposits has forced these lenders to choose the distribution model.

IndusInd Bank has signed an agreement with Housing Development Finance Corporation (HDFC) to sell HDFC’s housing loans through its branches. YES Bank is also exploring distribution pacts with both housing and auto finance companies.

Banks say higher fee incomes encourage them to take this route. “The returns from housing loan products are low. Yields on retail assets are typically range from 16 per cent to 17 per cent, while those for mortgage stand at 10-11 per cent. So, we decided not to have our capital blocked in these products,” IndusInd Chief Operating Officer, Paul Abraham, had told Business Standard last week.

“In retail, we would look at alliances and partnerships because we don’t believe we would be a significant manufacturer of retail products. We really want to be an efficient distributor,” said YES Bank founder, Managing Director and Chief Executive Officer, Rana Kapoor. “We have to look at models that are efficient. We want these to be fee-based businesses for us, not loan businesses. We would distribute all low-interest rate businesses. For high-margin businesses, we would have our own products,” Kapoor said. YES Bank has already initiated talks with HDFC and Dewan Housing Finance for distribution partnerships in mortgage products. For auto loans, YES Bank is looking at tie-ups with vehicle finance companies that are owned and managed by automobile manufacturers.

According to industry sources, the chances of asset-liability mismatches increasing in the future, due to the absence of a long-term deposit base, may have convinced these banks to take this route.

“Typically, a housing loan of a tenure of 15-20 years is backed by deposits with maturity periods of at least 7-8 years. So, if one enters the home loan business, one needs to have a strong long-term deposit base. I believe this is why some of these banks are choosing distribution tie-ups,” said a senior official of a Mumbai-based public sector bank.

Analysts say the distribution model would help banks avoid asset-liability mismatch issues and offer a wide range of products across segments. “If one is targeting corporate salary accounts and if he doesn’t offer products like auto and home loans, he may lose to competition. Distribution tie-ups would plug these gaps in product portfolios,” said an analyst with a domestic brokerage said.