The Indian retail credit boom

In the last 3-4 years, in the face of collapsing corporate credit demand and rising defaults in corporate loans (dating back to the days of a booming economy), the Indian banking system has been focused on growing the retail loan portfolio. Non bank finance companies have also been doing the same. For public sector bankers worried about investigations into suspected corrupt lending, retail lending has another big advantage from a career point of view. Since retail credit decisions are based on computer algorithms, there is much less risk of corruption allegations against individual staff members (and computers cannot be sent to jail).

Two questions arise at this point:

1. Has this retail credit boom progressed beyond the point of prudent lending? Anecdotal evidence suggests that at least for some lenders, the answer is yes. Since nobody wants to admit that they are lending imprudently, I prefer to ask market participants what CIBIL score cutoffs their competitors are using. During the last couple of years, I have heard this number fall from 650-700 to 600 and recently to 550.

2. How much of an impact would job losses in telecom and software services have on delinquencies in retail loans? It is too early to say, but clearly the impact would be non trivial.

I would think that the ongoing public sector bank recapitalization needs to keep this in mind. And perhaps at least some private sector lenders might want to think of a pre-emptive recapitalization.

Posted at 6:21 pm IST on Mon, 20 Nov 2017         permanent link

Categories: banks, risk management

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