Spare the system

The retail loan books of commercial banks have come under the Reserve Bank of India's (RBI) supervisory microscope. The brief for the regulator's inspection team is to check whether there is any "bubble" in the retail loan growth.

The inspection has been provoked by sporadic instances of fraud in the home loans segment. In their zeal to push housing loans, many banks are now left holding forged documents as some borrowers have offered the same property as security to different banks to raise loans. There have been a few instances also where the property mortgaged to the bank was found to be non-existent.

Similarly, borrowers have obtained car and consumer loans by submitting fake invoices. However, such cases are very few and these are more an aberration and not the norm. Therefore, there is nothing wrong in the RBI probing the retail books of commercial banks.

In fact, this shows the alertness of the regulator. But it should be careful in conducting the probe as otherwise it may end up spoiling the consumer spending party which has contributed to the "India Shining" story.

It is to be noted that the retail assets of banks are growing at a phenomenal pace. If senior bankers are to be believed, over 70 per cent of their incremental credit growth in the banking sector is on account of retail lending.

The non-food credit growth of the banking industry in 2003-04 was to the tune of Rs 1,31,562 crore and the contribution of the retail segment to this could be as high as between Rs 80,000 crore and Rs 1 lakh crore.

Housing loans led the charge with at least Rs 50,000 crore of disbursement during the year. The auto finance portfolio of several banks is also booming. The credit card business is thriving.

Over the last one year, there has been 100 per cent growth in the volume of transactions put through credit cards. In the personal loan segment, loans against shares are growing with the stock market on a roll.

At this rate of growth, by 2007-08, retail lending will constitute a significant part of total bank credit. It was less than 10 per cent in 2001-02.

Notwithstanding this scorching growth due to the banks' exuberance in pushing retail loans, the credit to GDP ratio in India is still minuscule compared with China, Singapore, Korea and other South-east Asian countries. Consumer finance is only 3 per cent of GDP in India while in Korea it is 21 per cent.

Similarly, mortgages account for 2 per cent of our GDP. The comparable figure in China is 6 per cent and in Singapore it is 68 per cent. As far as personal loans are concerned, they are about two per cent of GDP in India and the comparable figure is 120 per cent in Korea and 20 per cent in Singapore.

Moreover, the retail loans are granular in nature and hence safer than corporate loans. One big corporate account can take the bottom out of a bank's balance sheet if it goes bad while it will take thousands of retail loan accounts to do the same damage. Consumer spending can also play a major role in keeping the economy on a high growth path.

Higher penetration of retail credit will do wonders for both the economy as well as the Indian banking system provided the players put in place the right kind of checks and balances to detect the early signs of fraud. RBI must put in place these checks and balances, but not view the retail loan growth with suspicion.