Retail lending has had a good run in India in recent years. Disenchantment with corporate finance, the emphasis and almost direction by the concerned ministry to PSBs on increasing the retail portfolio and indeed the continuing interest in this segment across the entire banking industry, as well as the rapid increase in the number and growth of non-banking finance companies (NBFCs), have all played a part.
In fact, household debt to GDP has grown steadily from 9% in 2015 to an all-time high of 11.4% in the first quarter of FY2018. The percentage is still low as compared to many other countries, including those in our vicinity such as Malaysia (84%), Indonesia (17%) and Thailand (78%), and that gives us the hope that this segment will continue to outperform. Not only that, compared to other segments of finance, even within the retail space, personal loans have displayed the most robust credit quality. In fact, there was a short period during the year when bond yields spiked, when a 10-year SDL (state development loan) of certain states, was going at 30 basis points above the 15-year housing loan rate available to the man on the street. Such indeed is the perception of risk and profitability of this segment of finance.
As such it is hardly surprising that a large number of fintechs are also trying to find a toehold in this segment either on their own or in collaboration with larger established players such as banks and NBFCs. Similarly, the regulators have been scrutinising the pain points and have come up with various steps to both curb adventurism as well as encourage growth in the right manner. One big setback, though, in the use of technology for making personal loans easily and quickly available is the Supreme Court judgment on the use of Aadhaar. In fact, e-KYC was the basis for many fintech developments as it safely bypassed the need for physical contact and yet ensured that risk measurement, monitoring and mitigation did not suffer. The world at large admired India’s progress on this front and indeed, given the size and spread of our population, this enablement helped enormously in the financial inclusion efforts of banks as well as NBFCs. If there was one big obstacle in financial inclusion, it was the difficulty to establish identity followed by the sheer cost of a brick-and-mortar presence. The use of e-KYC comprehensively addressed both these issues. Consequent to the judgment, one has to necessarily return to the drawing board to find a solution, though we should definitely revisit the matter to address concerns expressed by the Supreme Court so that the whole initiative need not be fully abandoned.
A constant demand of those availing loans has been for lower rates of interest. However, with the central bank raising repo rates twice by 25 bps each, this was not to be. During the year there was, in fact, a modest rise in lending rates in line with the tightening stand of the Reserve Bank of India (RBI). The situation though has undergone a change and as of the last CPI (Consumer Price Index) readings, indications are that there will be a change of stance at the minimum if not a cut in rates at the next monetary policy committee meeting. People looking at obtaining loans should, therefore, not lose heart as falling inflation coupled with lowering of oil prices bodes well on this front.
But an even better development from the point of view of the consumer has been RBI’s announcement in December proposing the use of external benchmarking for floating rate retail loans like home loans from April 2019. This is expected to bring in much-needed transparency in pricing. For banks, though, this could be a big challenge. Unlike banks in Western countries which are dependent to the extent of, say, 30% on market borrowings for their resources which are sourced at rates linked to external benchmarks, Indian banks depend largely on deposits for their resources. These deposits are normally sourced at fixed rates of interest which again are not linked to an external benchmark. As such there is an obvious mismatch between the two sides of the balance sheet. Sufficient instruments for hedging this risk is also not available in the Indian market. It will be interesting to see how banks manage this risk going forward.
The other setback in the retail segment has been the liquidity crisis faced by NBFCs, specially the smaller and lower rated ones. However, there are recent indications of the situation easing and the market remains confident that this will soon pass.
In a nutshell, therefore, while this has been a year of growth in retail finance, the future appears far brighter.
Arundhati Bhattacharya is former chairman, State Bank of India