The Hindu Business Line : Retail banking: Effective instrument of transformation

Banks are exploring multi-channel delivery strategies — ATMs, the Internet, telebanking and even mobile banking — to leverage their retail lending strengths.

THE level of retail loans disbursed by banks at the end of fiscal 2004 was a record Rs 1,90,000 crore. Behind this figure were several factors: Sectoral GDP shifts, demographic changes, growing middle-class disposable incomes, low NPAs and high returns, low interest rates, growing consumerism and fiscal incentives for housing.

Housing loans constitute about 50 per cent of bank credit, with loans for automobiles, consumer durables, and education, and credit card receivables making up the rest.

Ubiquitous retail banking products are now the order of the day, with "anywhere, anytime, any-type banking" having come to stay. Retail deposit banking products include flexi/saving/recurring accounts, short-term deposits and deferred pension-linked deposit accounts.

And among the important retail lending products are loans for housing, white goods, education, vehicles, gold and festivals, apart from insurance products, and domestic and global debit/credit cards.

Growing retail market

A. T. Kearney recently identified India as the "second most attractive retail destination" of 30 emergent markets. Similarly, Associated Chambers of Commerce and Industry of India's (Assocham's) study, projected the overall retail market to grow from Rs 5,88,000 crore now (unorganised market Rs 5,83,000 core, organised Rs 5,000 crore) to Rs 8,00,000 crore by 2008.

The success of the organised retail market — encompassing the department store format, hyper-market cash-and-carry store, supermarket format and speciality retailing — rests on the right assessment of demographic customer profiles.

Exploitation of the latent "glocalisation" (think global, act local) potential requires robust growth in retail loans.

The Basel-II credit risk framework is based on a Merton-type model, calibrated to fit three retail exposure types relating to qualified revolving exposures, residential mortgage exposures and other retail exposures.

Change management

The steadily burgeoning retail banking portfolio, the constant refinements to the nature and pricing of retail products and the renewed emphasis on the customer-centric system, or what Prof C. K. Prahlad calls the "bottom of the pyramid", make retail lending the core competence of banks.

Acquisition of an agile, broad-based business model generating economies of scale requires synchronised action through direct communication with the end-user, product differentiation, product management, customer's credit history, proper borrower identification and skilful risk management. In the shift from bricks to clicks, multi-channel delivery strategies — ATMs, the Internet and telebanking — need to be increasingly used.

Commercial banks transcended traditional need-based lending to a broad-based portfolio reflected in the sharp rise of retail lending from 12.5 per cent in 2002-03 to 21.5 per cent in 2003-04.

Booming housing credit

Housing finance expanded rapidly because of investment demand and acute housing shortage. As housing became a key contributor to banks' profitability, certain facilities began to be routinely extended. These included processing fee waiver, pre-closure charges and guarantees, simplified loan procedure and provision of different services such as house insurance, repayment protection, credit/debit cards/ATM cards, and personal accident insurance.

Low interest rates and tax breaks boosted the level of bank credit to housing by 42 per cent in 2003-04 on top 55 per cent in 2002-03 and 38.4 per cent in 2001-02. Outstanding housing loans by scheduled commercial banks and housing finance companies grew at a trend rate of 23 per cent (1993-2004) vis-à-vis 14.8 per cent of scheduled commercial banks' non-food credit.

Housing loans rose progressively from 3.8 per cent, 6.1 per cent and 7.1 per cent of non-food gross bank credit from 2001-02 to 2003-04.

An analysis of the 58th round of National Sample Survey (NSS) data showed that housing loan disbursements by public sector banks in rural areas accounted for less than 10 per cent of total funds disbursed. Such lop-sided disbursement stems from bankers' recalcitrance in assessing and accessing retail customers in remote areas, ambiguous rural land titles, and so on. Housing finance's approximation of cost of funds calls for consideration of interest rates, margin, reset period, documentation and benchmark rate. Given the repayment tenor of 15-20 years for retail loans, particularly housing loans, as against most term deposits for three years, securitisation could remove mismatch in asset-liability management (ALM). A "reverse mortgage" system — a reversed conventional payment stream — could be instituted to convert equity in homes into cash a la America.

Skewed development

Housing loans account for 47 per cent of retail loans. The country's southern and western regions contribute 38 per cent and 22 per cent of housing loans, respectively, while the share of the Northern, Central, Eastern and North-Eastern regions was only 17 per cent, 11 per cent, 11 per cent and 1 per cent, respectively.Booming retail credit has certainly made cars, motorcycles, personal computers and white goods affordable to the rising middle-class. But as the housing sector has benefited the most, it will also feel the pinch of tight money the most.

NPAs in retail lending

The RBI's Report on Trend and Progress of Banking 2003-04 showed that the ratio of impaired assets to outstanding retail loans was 2.5 per cent (March 2004) whereas this ratio for overall bank loans and advances, aggregating Rs 8,60,000 crore, was markedly higher, at 7.4 per cent. Impaired housing loans were even lower, at 1.9 per cent.

Tracking customers' credit history could be done through a credit information bureau.

Mounting housing loan frauds by submission of forged land documents, fake salary certificates and forged income-tax assessment orders or income-tax returns means that inspection of property (pre-sanction) must be done with utmost caution and care, especially verification of the genuineness of property documents, checking salary certificates with employers, appraising the credentials of the borrower/mortgager/guarantor.

Rising indebtedness

India's position is not comparable to that of the US, the UK, South Korea and elsewhere, where household debt as a proportion of disposable income is at record highs, reaching more than 100 per cent. Even small changes in interest rates there could make these debts unmanageable, depressing consumer spending and global growth. As persuasively argued by International Monetary Fund, Goldman Sachs and others, this `structural break' with the past creates high uncertainty.

"Net households saving in financial assets to GDP" rose from 10.4 per cent in 2000-01 to 11.8 per cent in 2003-04. Retail lending may, however, aggravate the indebtedness of households with implications for repayment in a downturn.

Continued upswing

Globally, rising house prices emanated from the reckless prosperity (late 1990s), collapse of stock prices (2000) and slump in bonds (2002). Consequently, a global convergence towards real estate as a safe haven, as cogently argued by Yale economist Robert Shiller, is now firmly embedded in global culture. But the safety of real estate depends on how fast and far rates rise, because historically, property prices tend to plummet as rates increase.

Buoyant business growth, diversified business portfolio and higher profitability increased retail lending in India in the last four years at a compounded annual growth rate (CAGR) of 30 per cent. Such accelerated growth occurred, however, on a historically low base.

Retail loans constitute 5 per cent of GDP vis-à-vis about 35 per cent for other Asian economies — South Korea (55 per cent), Taiwan (52 per cent), Malaysia (33 per cent) and Thailand (18 per cent).

The level of retail banking penetration, at 12 per cent of total loans and advances, also continues to be significantly low.

Tracking growth-drivers

In bracing for tomorrow, a paradigm shift in bank financing through innovative mechanisms, such as templates for assessing customer risk and pricing product offerings, credit scoring, availability and use of information is needed.

Unlike the `lazy banking' of the past, banks now need to use retail as a growth trigger. This requires product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customisation, technological upgradation, home/electronic/mobile banking, cost reduction and cross-selling.

(The author is Chief Economist, Canara Bank, Head Office, Bangalore. He can be reached at sharma_m@canbank.co.in)

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