Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Why Banks Are Chasing Retail Loans - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Why Banks Are Chasing Retail Loans

Jun 15, 2018

Madhu Gupta

Battling the bad loan crisis in the corporate segment, the financial health of state-run banks has worsened in the past three years.

Public sector banks (PSBs) collectively posted a whopping loss of Rs 873 billion in FY18.

With nearly one-tenth of its loan book turning bad, PSBs have become wary of extending fresh loans to India Inc.

The focus has therefore shifted to the relatively safer retail loan segment.

But why are corporate loans risker than retail loans?

The reason lies in the Loss Given Default (LGD) ratio for loans.

The LGD is an important determinant of credit risks in banks.

It gives a critical estimate of risk in terms of how much the bank will not be able to recover from a loan past due if a borrower defaults.

Consider for example, the default outstanding amount is Rs 100 and the bank is able to recover Rs 30 then in this case the LGD for the bank is 70%.

--- Advertisement ---
A Method That Doesn't Take YEARS To Grow Investors' Money…

The fact is, most stock market strategies take YEARS to grow investors' money.

But what if a person needs the returns fast for some reason?

A method revealed by research analyst, Apurva Sheth, has the potential to generate returns in a fairly short time. And that too, from some of the best companies in the market.

Yes! To find out all about that method, just click here…

In other words, LGD is the percentage of a loan that is never recovered by a bank.

The actual default loss of a loan should take into account the length of the collection period and direct and indirect costs associated with the collection of recovery.

Higher the LGD ratio, greater is the risk associated with the loan segment.

LGD plays a vital role in the estimation and pricing of credit risk for banks. This helps them negotiate their bad loans with other banks and entities and thereby improve their capital strength.

LGD of a loan depends upon several factors such as the underlying collateral, what proportion of the collateral value has been extended as loan or the Loan-to-Value ratio, and the collateral's liquidity or marketability.

Therefore, the LGD varies across loan segments.

As per a survey conducted by 'The National Institute of Bank Management' on the 20-year loan history of commercial banks and NBFCs, the LGD across different loan segments are as follows,

Safety of Retail Loans
  Loss Given Default (%)
Secured Retail Loan 38
Personal Loan 70
Credit Card Loan 92
2-wheeler Loan 55
4-wheeler Loan 74
Secured Commercial Loan 62
Unsecured Commercial Loan 78
Source: Financial Express, The National Institute of Banking Management

Secured retail loans have the lowest LGD ratio of 38%. The loss rate is still lower for housing loans as they are secured by the mortgage of property that has good collateral value.

But the loss rate is higher in case of unsecured loans such as personal loans, credit card loans, and education loans. To compensate for this risk, the bank charges higher interest rate in these segments.

As compared to retail loans, commercial loans extended to the corporate sector have higher LGD ratios and are therefore more risky. However, the recovery rate is better for secured commercial loans with good collateral value.

PSBs which have traditionally focused on corporate loans, have been caught in the bad loan crisis.

Even as India Inc continues to struggle with slowdown and stretched balance sheets; low capacity utilisation and capital expenditure have led to sluggish credit demand from this segment.

Moreover as banks are yet to fully recover from the soured corporate loans, they do not want to extend further loans to this segment.

So it is hardly surprising that PSBs have turned their focus to the relatively safer retail loan segment.

But the competition is likely to be tough considering that private banks and NBFC's already have an established presence in retail loans whereas the newly formed small finance banks are aggressively tapping the bottom of the pyramid to set up their retail loan business.

Warm regards,
Madhu Gupta
Madhu Gupta
Research Analyst, ValuePro

Madhu Gupta

Madhu Gupta (Research Analyst), ValuePro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages.

Equitymaster requests your view! Post a comment on "Why Banks Are Chasing Retail Loans". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

How To Make Wealth Creation A Fulfilling Journey (Outside View)

Jan 18, 2019

PersonalFN explains how blindly following thumb-rules can be disastrous and how planning for wealth creation can be made a fulfilling journey.

Are active funds better than passive funds? (Outside View)

Jan 18, 2019

The debate about active vs. passive mutual fund schemes is heating up. Active funds are here to stay, despite rapidly gaining popularity of passive funds.

Sensex 100,000 Will Happen and I Want You to Profit from It (Profit Hunter)

Jan 18, 2019

These indicators reveal that the interest in stock market investing is only growing and set to grow.

Why I Believe You Can Make Phenomenal Gains in the Stock Market (The 5 Minute Wrapup)

Jan 18, 2019

These indicators reveal that the interest in stock market investing is only growing and set to grow.

More Views on News

Most Popular

Our First Bluechip Stock Recommendation in Smart Money Secrets(The 5 Minute Wrapup)

Jan 9, 2019

For the first time, we have recommended a bluechip stock in Smart Money Secrets.

3 Stocks in Super Investor Sumeet Nagar's Portfolio That You Can Buy Right Now(The 5 Minute Wrapup)

Jan 11, 2019

The reasons that make these six stocks in Sumeet Nagar's portfolio so compelling

This Trend Will Produce a Once in a Lifetime Opportunity to Buy Stocks(The 5 Minute Wrapup)

Jan 15, 2019

Unlike his habit of pouring out stock wisdom in his annual letters to shareholders, Buffett spoke of this trend only once every few decades.

My First Stock Trading Recommendation For 2019(Profit Hunter)

Jan 10, 2019

My first trading recommendation for 2019 is a bluechip auto stock. Find out everything about it right away.

A Proven Super Investor Can Lead to Great Wealth(Profit Hunter)

Jan 7, 2019

Following a super investor can certainly help build a portfolio that can create significant wealth in the long term.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Jan 18, 2019 (Close)