MUMBAI: Homeowners seldom stop paying their mortgages. It’s this belief in the credit discipline of retail borrowers that first drove the US banks to go for an overkill and then towards the brink (largely led by intentional missteps), which eventually ended up as the worst financial crisis in history in 2007-08.
Back home, Indian banks, which have burnt their fingers following years of reckless lending to corporates, are now placing their bets on retail customers. This increasing reliance isn’t at dangerous levels, but the banking regulator is already dropping hints and advising lenders to exercise caution, perhaps to prevent any future mishaps.
For the past few years, both public and private sector banks are making up for the slack in credit growth to industries by increasing their exposure to retail borrowers. For instance, ICICI Bank, whose March quarter net profit plunged by nearly half due to higher provisioning towards bad loans, counts retail as its largest segment. From 38 per cent share in the total loan portfolio in FY12, retail loans stand in excess of 56 per cent as on FY18. Still, the bank isn’t finished with the portfolio mix and is targeting to increase the retail loan book to 60 per cent by FY20. This fiscal alone, as Chanda Kochhar, MD & CEO, ICICI Bank, disclosed last week, the bank will grow its personal loans and credit cards segment by a massive 40 per cent. “We will be focusing on growing higher yielding loans within well-defined risk parameters,” she announced.
Ditto with Axis Bank, which has a 60:40 mix (60: retail & SME; 40: corporates) as on FY18, and is focusing on granularising the retail loan book by growing further through customer acquisitions from both branches and digital channels. The reasons for this rush to retail are evident. One, the risk component (defaults) can be minimised using credit worthiness based on credit scores and, later, by using data analytics, to trace and track the credit behaviour of a borrower. Further action can be pursued accordingly. Two, banks are also beginning to cross-sell products and expand their business potential.
The more services they offer, the higher the fee income will be per customer. In fact, banks already got a taste of it. Take Axis, whose retail profit grew six times in the last four years, from about seven per cent share in the overall profit before tax in FY13, it stood at 66 per cent as on FY17. Rajiv Anand, Executive Director (Retail Banking ), Axis Bank, attributes this towards the continuous thrust of the bank to reduce risk on both sides of the balance sheet.
“Currently, 84 per cent of liabilities, 47 per cent of total loans and 48 per cent of total fee now comes from retail customers,” he said, adding that data analytics helped the bank manage credit risk on retail portfolios, and pre-select customers to whom it should offer loans.
Importantly, banks are consciously lending only to existing customers as it helps them take known risks and calculated losses. As Dipak Gupta, Joint MD, Kotak Mahindra Bank, once said, “We don’t really go and stand at petrol pumps or malls to sell: bhai aapko credit card chahiye kya? Like we did in those pre-economic crisis days of 2008-09.”
Likewise, for Axis, 75 per cent of the retail loans are to existing customers, 86 per cent of the total retail advances are secured loans and have an underlying collateral. “The idea is to know the customer and lend only to the most appropriate segment. Use of credit bureaus to triangulate the credit worthiness of the customer before approving a loan is helpful,” Anand said.