Banks should be cautious in retail lending: Assocham

New Delhi, Aug 28 (UNI) Spiralling retail advances by major banks in the country with lending increasing by over 30 per cent year on year between March 2006 and March 2007 underscores a need for a caution even though the India does not have a sub-prime market, an ASSOCHAM Eco Pulse (AEP) Study has revealed.

As per the AEP study on Retail Lending', ICICI Bank's retail advances increased by 39 per cent at March 31, 2007, which constituted 65 per cent of advances.

Centurion Bank of Punjab has focused on the growth of retail business, thus, its retail loans account for 68 per cent of net advances.

Punjab National Bank's retail credit constitutes 22.7 per cent of its net credit. Retail loans of State Bank of India, one of the largest banks in India, constitutes 21.50 per cent of its total loan book.

''In the backdrop of increased focus on retail strategy and volatility of the financial markets, the Indian banks need to be more cautious while making disbursements in the retail sector.

They would do well to closely monitor their personal loan portfolios,'' ASSOCHAM President Venugopal Dhoot said.

According to the chamber, rising competition has seen over leveraging of customers, which along with rising rates may cause a rise in delinquencies. Even though this market is nascent, it's one of the fastest-growing loan segments, the Assocham survey said.

Unlike in the US, there is no sub-prime market in India. The US sub-prime market primarily consists of people with little or no credit worthiness, most of them charged to sub-prime borrowers being mortgage loans.

In India, Assocham said, the lower end of the personal loan market may be considered as a segment carrying some of the risks attached to the sub-prime.

Most customers in India are first-time borrowers from the organised market, and hence, have no credit history. The AEP study found that the big personal loans with an average size of around Rs 90,000 are given to more established individuals at lower rates of 14-28 per cent as against the 30-55 per cent level.

The survey adds that competition in the personal loans market has increased with the entry of multinationals, private banks and NBFCs. Citi Financial and GE Money are the oldest players in this market.

However, in recent times, companies like ABN Amro, Centurion Bank of Punjab, HDFC Bank, HSBC, ICICI Bank, DBS Cholamandalam, Fullerton India and Religare have been increasingly focusing on the personal loan. In most cases, the sub-prime market for these players constitutes somewhere between 5-20 per cent of the monthly disbursements.

Though some players like Citi Financial and Fullerton go through a personal screening of customers, this is not a practice being followed by everyone, says the survey.

Even though India is not exposed to sub-prime lending, the likely recession in the US market may affect the entire world economy. Indian stock market is showing a downward trend in line with the global markets as the prices of Indian shares, corporate bonds and real estate are decreasing.

Most of the commercial banks have focused on retail lending by registering an increase of about 32 per cent with a subsequent reduction of 13.75 per cent in their Non Performing Assets (NPAs) on a Y-o-Y basis during the financial year 2006-07.

Though the Indian banks have significantly reduced their NPAs, the sub-prime mortgage crisis in the US might still be a cause for concern in India as well, the study said.

It further revealed that among the major commercial banks, Centurion Bank of Punjab (CBOP) topped the list in extending loans in the retail segment. CBOP saw a huge growth of 65 per cent in their retail business in FY 2006-07.

Others in the pack doing well in this area of lucrative retail banking included ICICI Bank (38.5 per cent), Bank of India (35 per cent), Dena Bank (33 per cent), Allahabad Bank (29.3 per cent) and HDFC Bank (22.9 per cent).

US sub-prime mortgage crisis began in late 2006, when thousand of borrowers defaulted in payments, as a result, many lenders had to file for bankruptcy, leading to a direct impact on US housing market and the economy as a whole.

Some economists, including former Federal Reserve Board Chairman, Alan Greenspan, have expressed concerns that the ''subprime mortgage crisis will impact the housing industry and even the entire US economy. In such a scenario, anticipated defaults on subprime mortgages and tighter lending standards could combine to drive down home values, making homeowners feel less wealthy and thus contributing to a gradual decline in spending that weakens the economy.'' Last year, 13.5 per cent of mortgages originated in the US were sub-prime, according to the Mortgage Bankers Association, compared to 2.6 per cent in the year 2000.

Overall, the sub-prime market was 600 billion dollar in 2006, 20 per cent of the three trillion dollar mortgage market, according to Inside Mortgage Finance.

In the year 2001, sub-prime loans made up just 5.6 per cent of mortgage dollars. By the end of 2006, sub-prime delinquencies more than 60 days late were almost 13 per cent, compared to eight per cent a year earlier.

With the failures of high profile US financial firms working in the sub-prime mortgage market, credit risk premium on the US corporate bond market have also risen sharply. Global investors are willing to take a lower risk for getting the same returns today and are now demanding a higher premium in return for bearing any kind of risk, including that of stocks of emerging market economies like India.

Assocham says that lower prices for shares, corporate bonds, and real estate in Indian markets is a direct result of this UNI