Stung by the corporate downturn, banks seek solace in lower-risk retail loan offerings.

One look at the newspaper and you see enticing loan offers for homes, cars, education and even electronics such as your laptop and your phone. You pick up the phone and the caller is offering you a personal loan, home loan, credit card and so on.

Think back a few years and you realise how recent this phenomenon is. Indian banks were famous for 'lazy banking' where they only offered loans to larger companies and stayed away from doing the harder task of setting up branches and tapping the retail loan opportunity.

But, the changes in the country's economy and demographic over the last few decades, have pushed even the most laggard banks to polish their retail offerings and try to attract loan business from the younger, more spend-friendly population. The younger generation earns more and tends to have a higher risk appetite which reflects in them taking greater leverage and taking education loans, buying a car or even acquiring a house.

The change in the economic environment, tighter regulatory caps on extent of lending to corporate groups and the recent downturn faced by companies, has seen banks scrambling to beef up their retail bouquet to ensure they continue to grow their loan books.

Retail loans tend to be relatively risk-free for banks with stronger underlying collateral such as cars and homes. Even though these retail loans tend to carry lower margins due to their lower risk levels, they provide quick growth and also help protect banks asset quality ratios. They also attract lower capital costs due to the collateral and are thus good lending opportunities. Also, Indian regulations as set by RBI, has ensured that banks stay away from teaser loan offerings which see the prime cause for the sub-prime crisis in the U.S.

Indian retail loan borrowers have also shown better repayment ability over time, as the societal stigma over defaulting on a loan is greater for an individual rather than a corporate entity. The fear of 'name and shame' or repossession by banks also lower the chance of retail default.

India remains a vastly under banked country, with account opening programmes such as Pradhan Mantri Jan Dhan Yojana and other schemes such as Atal Bima Yojana, trying to bring the unbanked into the formal financial sector. Over time, some of these new account holders may reach a scale where they may be keen to tap banks for consumption loans. That is an enormous 50% of the population that will need loans in the future and banks need to prepare for that growth in the future.

Even when corporate sector demand revives, banks are unlikely to look away from the retail business which has proven to be much more resilient in the face of a crisis.

 

By Editorial Team

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