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Financial inclusion at stake

The alarming growth of non performing assets in the retail loans sector (personal loan, unsecured loan, auto loan and credit card) will have negative impact on the smooth functioning of the Indian banking system. This will affect the goal of attaining greater financial inclusion.

Author: Addi Vardhaman

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The magnitude of non-performing assets (NPAs) from retail loans offered Indian commercial banks are set to rise during 2008. In the recent report of Crisil, an eminent global financial ranking agency, its was revealed that the gross NPAs in retail loan segment are set to rise to 4% in 2008 and 2009. The agency has pointed out that an increased delinquency level across all retail asset categories will further increase the NPA in the retail loans.

The recent move by the apex bank RBI to tighten the norms for recovery agents employed by commercial banks could also add to the increase of NPAs. The liberalised terms of recovery will further encourage willful defaults by borrowers.

However, the situation is still manageable, because the less risky mortgage and personal loan segments continue to dominate the retail lending portfolio of lenders. Presently, 80% of total loans outstanding falls in this category. The increasing personal incomes and younger borrower profiles provide cushion in for the recovery of loans. Profitability of banks is also expected to be hit in 2008 on account of higher provisioning by banks and rising deposit costs. This profit will compensate the NPA loss.

Crisil’s analysis highlights that, the deterioration in retail loans(including personal loans, credit cards and unsecured loans) is due to to increasing exposure of banks to higher risk customers and the rising interest rates. The increasing exposure to vulnerable customers is mainly through personal loans and plastic money receivables. These loans are generally unsecured and account for 17% of total outstanding retail loans. They constituted 6% of the total loan amount in the banking system in 2004. As competition has become fierce in Indian banking system , players in retail lending, in their quest maximise profits are reaching out to newer clients such as the self-employed and people with suspicious credit history.

The report issued by Crisil has also noted that delinquencies across all asset classes have gone up and this trend is likely to continue in the financial year 2008-09. Gross NPAs from personal loans that account for half the retail loans in India. NPA in auto loans accounts for one third of retail loans and is expected to go up by 70 to 150 basis points in financial year 2008-09. Delinquencies have reached a new peak due to the slowdown in recovery efforts and the controversy regarding recovery methods used by some lenders. The possible fallout of this controversy may be some players vacating the small-ticket personal loan segment. This may also drive lower income borrowers to seek recourse to the traditional money lenders, which will be detrimental for goal of seeking larger financial inclusion.

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Financial inclusion at stake