Aug 19, 2003|
Banks: Retailing dilemma
Poor credit offtake growth is a concerning issue plaguing the minds of economists around the country. There is a considerable amount of liquidity in the market helping corporates to bargain their way through finer interest rates for their loans. The situation is no different in the fast growing retail segment, where consumers are able to arm twist banks in to giving them loans at a rates lower than those declared.
But, why is low credit offtake a problem for the economy? For one, this indicates sluggish investment activity in the economy. This further means that growth over the long-term might stagnate at a point due to lower investments. Also, subdued credit offtake is indicative of the fact that banks have a lot of surplus funds that they eventually land up deploying in G-Secs. This, in turn, makes their (banks’) investments non-remunerative as G-Sec yields have been at all time lows for some time now.
However, the dilemma for banks does not end here. The situation takes a graver turn when banks, in their aim of tapping the high-growth retail segment, are forced to give in to consumer demands of lower lending rates. For example, a housing loan that would ideally carry an interest rate of 9% for a period of 20 years can be obtained at 8% depending on the bargaining power of the consumer. In fact, banks are so desperate to expand their loan portfolio that they resort to unhealthy means to capture the market.
Retail asset growth (YoY) in FY03
In the Indian scenario, the boom in the retail segment is unprecedented and this in itself is a concern, as well as a boon. This growth in the retail segment signifies the emergence of a new consumer class that believes in spending more by way of borrowing. Since there are limited avenues of financing corporates in the current scenario, banks are going all out towards the retail segment. While this is good as far as growing the advances portfolio is concerned, one needs to understand that Indian banks, especially public sector banks are new at retail financing. Due to this, being aggressive in this segment will have its own drawbacks.
Lending aggressively, without assessing the credit risk appropriately, may lead to unpleasant surprises later on. It is still too early to comment upon the likely levels of NPAs among retail portfolio of banks, and would be a naïve assumption that there may be no negative surprises going forward. While one may be enamoured by the aggressiveness of both private as well as public sector banks in the retail segment, we would advise investors to be cautious and invest only in those banking stocks that have sound fundamentals and a good track-record (resilient performance, even in bad times).
To conclude, we would like to point out that it is not just important to view growth (in advances) in the banking industry, but also to view it from the perspective of quality of growth these banks are attaining.
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