Rising interest rates have hit banks’ consumer finance business, particularly the housing loan segment. In the unsecured loan segment, growth in personal loans has moderated to 20 per cent at Rs 81,451 crore as on November 23, 2007, as against a 35 per cent growth at Rs 1,05,034 crore in the previous year.
The dip in growth is led by a slowdown in housing loan portfolios of banks. Interest rates on home loans have increased to over 10 per cent, affecting demand. The rising real estate prices have also had an impact on the loan growth.
Growth in the housing loan portfolio of banks has seen a 15 per cent growth at Rs 32,424 crore as on November 3, 2007, as against a 33.4 per cent growth at Rs 53,198 crore in the same period last year.
Credit flow to the real estate sector has also seen some drop, with the growth moderating to 33 per cent from 77 per cent. Despite the dip in credit growth to the sector, the Reserve Bank of India (RBI) views the 33 per cent growth to be high.
In the personal loan segment, consumer durables loans saw negative growth. The major financier of consumer durables such as GE Money exited the business with margins coming under pressure.
The consumer durables finance business has become unattractive and competitive for finance companies as large retailers are now running their own financial schemes through their own subsidiaries.
“Select banks have consciously decided to go slow on housing and personal loans. Some banks have seen a rise in default rates on personal loans on account of reckless lending.
The rising cost of capital has forced banks to go slow on home loans. This has affected credit growth,’’ said a senior banker. The rising defaults in the small-ticket personal loans have forced players such as ICICI Bank to exit the business. Citifinancial and HDFC Bank are also going slow in this business.
RBI is also convinced that non-performing assets (NPAs) for some banks in the consumer credit, housing and real estate segments have risen, but this has no systemic implication either in terms of solvency or liquidity.
“The money and credit markets in India have so far remained relatively insulated from the international financial market developments. India’s exposure to troubled sub-prime assets and related derivatives is negligible in comparison with many other economies. Notwithstanding some reports of accelerated emergence of non-performing assets with regard to consumer credit, housing and real estate in a few banks, the preliminary assessment showed that they do not have systemic implications either in terms of solvency or liquidity. This has reflected the nuanced and gradual approach in India’s financial sector reform process with the building up of appropriate safeguards to ensure stability, while taking account of the prevailing governance standards, risk management systems and incentive frameworks in financial institutions in the country,” said RBI.
The slowdown in the personal loans segment and the housing sector has seen rebalancing in the banks’ credit portfolio. Growth in bank credit to the commercial sector moderated during 2007-08 (up to January 4, 2008) from the strong pace of the previous three years.
The non-food credit by scheduled commercial banks (SCBs) expanded by 22.2 per cent, year-on-year, as on January 4, 2008, compared with 28.4 per cent at March-end 2007 and 31.9 per cent a year ago. Disaggregated sectoral data available up to November 23, 2007, show that about 43 per cent of the incremental non-food credit y-o-y was absorbed by industry compared with 34 per cent in the corresponding period last year.
The expansion of the incremental non-food credit to industry during this period was led by infrastructure (power, port and telecommunication), iron and steel, textiles, engineering, food processing, vehicles, petroleum, chemicals and construction industries.
The infrastructure sector alone accounted for over 28 per cent of the incremental credit to industry compared with 18 per cent in the corresponding period of the previous year.
The agricultural sector absorbed around 12 per cent of the incremental non-food bank credit expansion.
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