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Business News/ Market / Stock-market-news/  Retail lending to re-emerge as a priority for banks
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Retail lending to re-emerge as a priority for banks

With a decline in lending to companies, banks are looking at retail lending as the next growth driver

A big part of household investment goes to residential construction and other physical assets. Photo: Priyanka Parashar/MintPremium
A big part of household investment goes to residential construction and other physical assets. Photo: Priyanka Parashar/Mint

The drop in lending by banks to the corporate sector (which has halved in financial year, or FY, 2015 from FY14) because of the lower capital expenditure has compelled banks to focus on other lending avenues, primarily retail and small and medium enterprises (SME) segments. India, given its favourable demographics, has huge potential for retail lending. Thus, it is expected that the share of retail loans in lending may climb from 19% in FY14 to 24% over the next four years.

By February 2015, credit growth in the banking sector had dropped to 9.4% because of low (6%) growth in industrial credit. Further, in incremental terms, corporate credit (industry and services) was 2.5 trillion in FY15 versus 4.7 trillion in FY14.

Corporate sector key to investment recovery

In India, a large part of investment comes from households, which contribute more than 50% of domestic-funded investment overall. A big part of household investment goes to residential construction and other physical assets. The private sector is a close second, contributing about 40%. Hence, it is not surprising to find that corporate investment is the most dynamic and cyclical part of domestically-funded investment.

External funding (all except internal accruals) of the Indian corporate sector registered a 49% compounded annual growth rate (CAGR) during FY03-FY08. In the aftermath of the financial crisis, the situation worsened drastically in FY09, followed by a smart recovery between FY11 and FY13. In the past two years, however, the situation has deteriorated. Corporate funding contracted 15% in the past two years; the FY15 figure is the lowest in five years. In India, banks have traditionally been the main source of corporate funding. Banks have provided more than 50% of corporate funding, with the percentage falling over time.

For the first time, in FY15, proportion of domestic corporate debt in corporate funding has exceeded that by banks.

Case for retail loans

With a decline in the inclination as well as the opportunity to lend to companies, banks are compelled to look at other avenues. Retail lending is the next growth driver for Indian banks. A comparison of India’s retail lending penetration levels with developed and emerging markets, when juxtaposed against demographic trends and income levels also reflect significant long-term potential. After a slow 4-5 years, a turnaround in Indian retail finance market is expected.

While incremental return on equity (RoE) for banks currently range between 8% and 17%, this may increase with a rise in the proportion of retail lending. A repeat of 2004-2007—when competition had cut into banks’ profitability—is not expected. Overall, RoEs for banks would increase, driven by higher RoEs on retail products than in corporate lending.

Banks are also turning innovative in terms of retail products.

Per capita growth

India’s per capita income, at $1,165 in 2013, was one-third of China $3,583. The pace of growth in gross domestic product (GDP) per capita for India has risen over the past four decades. India has now overtaken China as the fastest growing nation in terms of real GDP growth. According to World Bank, India’s GDP growth will accelerate in 4-5 years, while China’s is likely to slow down. By 2020, India’s population is likely to increase to 1.35 billion, but still below China’s expected 1.43 billion. Low population growth with accelerated GDP would push up per capita GDP. Consistent rise in India’s per capita income can drive consumer spending.

Edited excerpts from report named Retail Tailwinds, from Anand Rathi Shares and Stock Brokers Ltd.

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Published: 19 Apr 2015, 08:30 PM IST
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