In 2010, when Sweta Ghosh applied to a private bank for a credit card, she received a note that stated the lenders inability to offer her a card, since she did not have an existing relationship with the bank. Two years later, Ghosh is getting calls from the same bank almost every week, offering her a credit card with no annual fee.
I am quite surprised. They rejected my application in 2010 even though I was working with a large real estate company. But now when Im not working they are pleading with me to take a credit card, Ghosh, who is now a housewife, said.
One no longer needs to go to a bank branch to apply for a personal loan, feels Vikram Rai, a senior software engineer with a multinational company in Bangalore. Every day, I get calls or receive mails from different banks offering loan schemes at affordable interest rates, he said.
It certainly appears that the common man is now getting the red carpet treatment from bankers who seem to have shifted their focus from the corporate segment.
Bankers attribute the change in strategy to two factors: One, companies credit appetite is shrinking in the current uncertain economic environment; and two, individual customers do not pose the risk of large-scale deterioration in asset quality.
In the recent past many Indian companies have been knocking on bankers doors, seeking to restructure their debts. The uncertain business environment, slowdown in demand and stressed cash flows have prompted them to request banks for longer repayment periods, cuts in interest rates and, in some cases, waiver of part of their debts. Initially, most banks appeared keen (at least statistically, if not visibly) to restructure the loans of large corporate clients, even at the cost of taking a haircut.
Typically, the weaker sections are affected more severely during an economic downturn. Hence, logically, the share of restructured loan accounts in the SME and farm sectors should have been higher than that in the large and mid-corporate segments.
But it was not, since banks were reluctant to admit loan restructuring requests from small borrowers. Reserve Bank of India (RBI) data show that in 2011-12 the ratio of restructured advances to gross advances was highest (9.34 per cent) for medium and large industries, while for the agriculture sector it was only 1.45 per cent.
The banking regulator was not comfortable with this situation; it observed that banks were showing a substantial bias towards privileged borrowers when loans were to be restructured. While India Inc allegedly was taking advantage of the corporate debt restructuring (CDR) mechanism to suit their needs, banks were blamed for being hand-in-glove with corporate houses to defer non-performing asset classification and show better earnings.
However, it appears that banks have now realised that this cannot be a long-term solution and are shifting their attention to small and individual borrowers to shore up business growth. Despite the slowing down of growth in overall credit demand, growth in home loans, auto loans, gold loans and credit cards has been impressive in the past one year.
Banks are making a comeback of sorts in credit cards, a business where they had burnt their fingers in 2008-09. HDFC Bank, the largest issuer of credit cards in the country, aims to double its portfolio to 10 million cards by the end of 2013. While new players like IndusInd Bank have made an entry in this business, existing players like ICICI Bank, Citibank, Standard Chartered Bank and SBI Cards have augmented their offerings through new card launches.
The credit cards business registered 17 per cent growth in the 12-month period ended October 2012, compared to five per cent in the 12 months to October 2011. Overall credit growth in the year to October 2012 slowed to 15.9 per cent, from 18.7 per cent in the year-ago period. High growth was also witnessed in home loans and vehicle loans.
Currently, we find that the investment cycle being what it is, demand is coming from the household sector. We are positioning ourselves more on the retail side, both for resources and lending, Pratip Chaudhuri, chairman of State Bank of India (SBI), said.
The countrys largest commercial bank, which has priced retail products like home and auto loans aggressively, witnessed a surge in loan sanctions in these segments. In the last three months, its daily home loan sanctions have more than doubled, from Rs 65 crore to Rs 150 crore. SBI expects 25-30 per cent growth in its home loan portfolio, while its overall loan growth is expected to be 16-18 per cent.
Most bankers agree that the retail sector will drive credit growth for at least the next few years, as corporate loan demand continues to stay low.
ICICI Bank, which cut its unsecured lending to protect asset quality, has identified housing loans as one of its growth drivers. It has introduced a new housing loan product that will offer borrowers cash back on every EMI for the entire tenure of the loan. The bank is also offering clients the option to renew their fixed rate loans for tenures of two, three or five years at a zero conversion fee, within 30 days of completion of the initial fixed rate tenure.
Our market share in retail had come down from about 25-30 per cent, for example in mortgages, to 5-6 per cent. We have slowly improved it to about 7-8 per cent currently. There are indeed competitive pressures in terms of rates, but our turnaround times and service proposition are strong, N S Kannan, executive director and chief financial officer at ICICI Bank, told analysts while speaking on the banks retail loan expansion plan. The bank is confident of being able to grow its retail assets by 15 per cent this financial year, he added.
How does retail credit fare better than corporate loans? Shyamal Saxena, general manager for retail banking products and consumer banking at Standard Chartered Bank in India and South Asia, explains that the retail segment is less susceptible to ups and downs in the economy. Also, the risk is more widespread and no single customer can bring down the health of your entire credit portfolio. It helps banks to build long-term resilience. Thats why the retail segment is important for banks from a strategic level. At the operating level, it ensures predictable income streams, he said.
Private lender Axis Bank, which aims to increase the share of its retail loan portfolio to 30 per cent by 2015 from 26 per cent now, has also come up with innovative schemes to attract retail borrowers. The bank introduced a new home loan product where the borrower will not have to pay the last 12 EMIs if he has been repaying money on time. The product, Happy Ending Home Loan, is offered to new borrowers at the same rates as a regular floating rate housing loan product of the bank.
Credit and economic cycles have remained benign for the past few years. The stress has been particularly severe on the corporate side of the business. Hence, retail lending has become relatively more attractive for banks, Jairam Sridharan, senior vice president and head of consumer lending and payments at Axis Bank, said. Also, banks are now more careful in offering retail unsecured loans. Credit bureau data is now available with banks, lending standards are tighter and there are internal checks and controls. The risk of delinquencies has reduced considerably, he added.
According to bankers, the increased discipline of retail borrowers in loan repayment (evident from the steady decline in delinquency rates) has made the segment attractive to lenders. In addition, data from credit information companies have allowed bankers to decide on loan sanctions more easily.
The last time round (when banks lost money in unsecured retail lending) the credit underwriting infrastructure, namely credit bureaus, was not strong and mature. But the quality of information and the richness of the bureau is much better now. Banks are well informed about the profiles of their borrowers. The ecosystem which supports credit underwriting has improved a lot and allows banks to take informed lending decisions, Saxena of Standard Chartered Bank said.
Indeed, the delinquency rate in the credit cards segment has plunged from seven per cent in the last quarter of 2009 to 1.5 per cent now, following the strengthening of the credit information companies.
Credit Information Bureau (India) Ltd or Cibil, the countrys premier credit information bureau, currently has some 240 million retail credit records and 13 million commercial credit records. Since the system is fully automated, a banker can log into the Cibil database to access this information.
Today, because information from all lenders comes to Cibil every month, before a lending decision is taken by a bank it can log on and look at the credit track record of the borrower. The bank can take informed decisions. If you compare it with 10 years back, a bank used to have a credit information department which used to go to the market and check. It was a tedious task, M V Nair, chairman of Cibil, said.
Cibil rates an individual on a scale of 300 to 900, and a high score reflects a better credit record. According to Nair, in 2009, only 23 per cent of home loan borrowers had a credit score of more than 700. Now, 63 per cent of borrowers have a score of 700 and above. So banks are choosing borrowers who have a higher credit rating, he said.
The message that a higher score is required to secure a loan also appears to be clear among borrowers. There is a systematic improvement in credit track records and customers themselves are trying to improve them, Nair said.
Clearly, with individuals becoming more disciplined and companies reluctant to borrow, banks are pinning their hopes on the common man to drive business growth.
BANKS UP THE ANTE
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November 2012: ICICI Bank introduces a new housing loan product that will offer borrowers cash back on every EMI for the entire tenure of the loan
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October 2012: State Bank of India cuts processing fee on home and auto loans by 50 per cent
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September 2012: Axis Bank introduces a new home loan product where the borrower will not have to pay the last 12 EMIs if he has been repaying on time
