Banks betting big on retail loans

##SMALL-IMAGE## With rise in bad loans and fall in growth of corporate credit, banks have been compelled to look at other avenues. Retail lending is the next growth driver for Indian banks. In last two years, the volume of outstanding retail credit has jumped from Rs 9.55 lakh crore in November 2013 to Rs 13.04 lakh crore in November 2015. The major share of retail lending goes to home loans which account for over 54 per cent of the total retail loans as of November 2015

In the milieu of asset quality concerns, many banks have begun to shift their focus from lending to large corporate sector to retail sector in a big way. The priority is gradually moving towards lending to individuals where the risk adjusted returns are high. Mired under the heavy debt burden, many overleveraged corporates have also been struggling to bring down their borrowings by monetising their unrelated assets, including land and buildings. Many companies are on a binge to reduce their debt burden.

Due to the lingering slow down in the economy, the demand for credit in the last two years has been low. As result, bank credit to industry had increased only by 5.0 per cent in November 2015 as compared to 7.3 per cent in November 2014. Deceleration in credit growth to industry was observed in all major sub-sectors barring to retail sector. But on the whole, the year-on-year (y-o-y) basis, non-food bank credit increased by 8.8 per cent in November 2015 as compared with the increase of 10.5 per cent in November 2014. The deceleration in bank credit has been a result of multiple factors including the differentiated approach of the banks to towards lending.

The upsurge in retail credit

Consequently, credit to retail sector increased by 18.0 per cent in November 2015, up from the increase of 15.8 per cent in November 2014. The shifting trend in credit expansion is discernible from the following data points:
In just last two years, the volume of outstanding retail credit has jumped from Rs 9,55,100 crore in November 2013 to Rs 13,04,600 crore in November 2015. The major share of retail lending goes to home loans working out to over 54 per cent of retail loans in November 2015. With a decline in the inclination as well as the tepid opportunity to lend to companies, banks have been compelled to look at other avenues. Retail lending is the next growth driver for Indian banks. A comparison of India’s retail lending penetration levels with developed and emerging markets, when juxtaposed against demographic trends and income levels also reflect significant long-term potential to lend to retail sector.

The competition

In the emerging environment, all banks are offering same range of retail lending products. The competition is intense. With wafer-thin margins in interest rates, the only competing point is the process part. All major banks cut processing fees under festive season schemes to attract new borrowers with better ticket size. The higher the loan amount, better are the terms of offer to capture higher market share in retail lending space. Since banks cannot offer loans below base rate, mark up above it is fine-tuned. Though most of the borrowers just want to compare home loan interest rates, the other terms are also under focus due to intense competition.

Borrowers are getting equally interested in checking processing fees, hidden charges, pre-payment charges, applications fees, equated monthly instalments (EMI), lowest EMIs, tenure, flexibility in repayment period, ballooning EMIs with progressively higher EMIs adjusted to the expected income levels of borrowers. Banks quote better interest rates to woo the borrowers. Concessions in interest rates for women borrowers, targeting special cluster of borrowers, relaxed processing fee, and diversity in computing EMIs etc are some of the means to stay ahead in the market. Providing add-on loan facilities for furnishing, accessories for the house and interiors are also on offer in some banks. There are websites like Bankbazar, deals4loans, brainyquote, apnapaisa, bankrate.com, trulia.com, zillow.com and so on which provide a comparative position of offers of banks and offer a best quote as per the data provided by the prospective borrowers.

Reduced turnaround time (TAT)

Following the advancement of technology, many banks have undertaken Business Process Reengineering (BPR), some of them with the help of consultants to align better processes compatible to the latest technology. Moreover, with pricing margins thinning down, the competitive focus is gradually shifting to speed up credit delivery services to the borrowers using enhanced technology and improved skill sets. Under BPR drive, many banks have hived off the processing of retail loans to back offices for centralised loan processing centres (CPCs) to enhance operational efficiency. Since such loan processing centres are developed as hubs manned by credit processing experts, the turnaround time is maintained at competitively low level.

Process reforms

Thus many banks are able to assure borrowers to deliver retails credit products on predefined time lines. Some banks are able to offer retail loans in 5 to 7 days depending on type of loans. Bank branches are required to submit retail loan applications to CPCs for speedy processing and delivery of credit. Competition is now getting shifted to TAT as a value proposition. More innovations in simplifying retail loan process at such CPCs are envisaged to deliver better value to borrowers. Simplification in processes, reduction in documentation, paper requirements and more digitisation is used to reduce processing time. Thus banks are well poised to compete more with the improved processes rather than on price in retail loan space. With reduced scope for lending to corporate sector due to slackness in demand, focus of banks is now more on retail lending for business growth. In future more and more technology led process reforms in retail lending will be needed to muster better market share.

(The author teaches at the National Institute of Bank Management (NIBM), Pune. The views are his own)