V Vaidyanathan; Senior General Manager, ICICI Bank
Retail credit in India has been growing at about 40 per cent per annum over the past few years. The high growth rate does scare some observers, but is misleading as it comes off a low base.
Even after the robust growth in recent years, consumer credit outstanding as a percentage of GDP is low at 8 per cent for India, as compared to over 30 to 70 per cent for other south-east Asian countries.
The question to ask is: Is consumer finance growing by broad basing retail credit to a larger customer base, or by over leveraging the existing customers? Is the average consumer leveraged more than he should be? The latter is easy to answer if you look at the consumer finance to GDP ratios.
To answer the first, let us look at the following data. The number of households earning over Rs 80,000 per annum has increased from 40 million in 1996 to 60 million in 2005.
Simply, these additional 20 million who can now afford credit is a new customer base. Parallel to this, household incomes have increased.
The National Council for Applied Economic Research (NCAER) data for top 24 cities in India shows migration to higher income levels at over 40 per cent per annum.
Finally, the past decade has witnessed a rapid expansion of retail credit to tier 2/ 3 cities. To take ICICI's example, while we offered consumer finance in 15 cities in 2000, we do so in over 1,000 cities and towns today.
Tier 2/ 3 cities now contribute to over 30 per cent of our consumer finance, up from low single digits some years ago. All this points to the fact that the customer base has expanded to contribute to this growth.
Of course, other demographics, too, favour India. At 70 per cent, India has the highest proportion of population below 35 years of age. The Indian population also has a large working class (58 per cent).
Therefore, it is easy to conclude that the growth in retail credit is being driven by sound fundamental factors such as the upward migration of income levels, increasing availability and affordability, and increased acceptance of credit.
As per SSKI estimates, only 16 per cent and 29 per cent of those who can afford mortgages and car loans, respectively, have availed of these products! My guess is that even these numbers are conservative.
Another concern is that retail credit providers are increasingly compromising on asset quality for rapid growth. Detractors often quote the negative experiences with retail credit quality in Korea.
The Korean example proves the maxim that a little knowledge is a dangerous thing. Korea has 3.1 credit cards per bankable population against India's 0.02.
Korea has 90 million credit cards with $100 billion outstandings, against India's 14 million and $2 billion. In India, over 90 per cent of outstandings for retail bankers are secured by house or vehicles. Only 10 per cent of the portfolio is unsecured.
The other concern is whether portfolios may deteriorate with ageing. Most large retail bankers have completed multiple cycles in auto-loans, two wheeler loans and so on.
On mortgages, while all lenders have not yet gone through complete credit cycles, the defaults are relatively lower because of stable property prices, increased incomes of borrowers, increased equity of the customer with ageing, and mortgages being the first priority for a customer to repay.
I feel most retail credit providers are adopting a sensible approach towards lending in India. According to the recent RBI data on non-performing assets (NPAs) in retail, net NPAs in home loans are only about 1.4 per cent of the banking system's home loans.
The net NPA levels in total retail portfolio (including credit cards) are also low at 1.6 per cent. While these are the averages, our experience shows far lower delinquencies.
Some analysts express concern about the lack of a national credit bureau in India. I think bankers do a lot more due diligence in India to make up for this, through physical verifications, references, and review of bank statements.
(Albeit less cost efficient, some may argue). Annualised credit losses in retail banking in India, adjusted for net interest margins compare well (in fact, outperform) with the UK, the US and south-east Asia.
In any case, credit bureaus are around the corner and I feel bankers will definitely support the initiative.
I must also add that the retail business contributes significantly to the growth of the economy by increased consumption of steel, cement and so on, through increased sale of cars and homes, besides being a huge employment generator.
I feel consumer banking will continue to offer significant growth opportunities in India in the years to come.
Leo Puri; Director, McKinsey & Company
Emerging markets are following developed markets in a consumer revolution that has intensified over the past 10 years. In east Asia, for instance, governments have turned to the consumer for growth after decades of export-led economics that held consumerism in check.
The consumer is being leveraged through mortgages, auto loans, credit cards and other forms of consumer finance. This has become the focus of all rapidly growing financial institutions across markets.
The Indian financial sector, too, is seeing unprecedented activity. Consumer finance assets are seeing growth of over 30 per cent a year, driven by rising incomes and affordability.
Inevitably, concerns have been raised on the health of this portfolio and on consumer indebtedness.Our view is that there is no systemic consumer finance bubble in India; on the contrary, consumer finance must be encouraged to grow in a healthy manner and contribute to the overall economy.
However, individual institutions have to evaluate if they have the skills required before participating in this market. Poor skills and weak processes are endangering some banks and we are going to see impaired portfolios as they grow without skills.
Consumer finance is in different stages of evolution in different markets. For instance, while there is only one credit card for 1,300 people in China, there were over four cards a person in Korea; 20 per cent of China's private cars are financed today, as compared with 70 to 80 percent in mature markets.
Consumer finance in a market evolves over time, typically following an "S curve" of rising consumer finance penetration relative to per capita income.
The journey may take anything between 10 to 20 years before a market reaches levels of maturity. However, not all markets follow this trend. We have the Korean credit market as an example, which saw rapid growth followed by a "credit crisis".
Why do markets go off this curve and go through busts? The answer lies in local market structure and macro-economic factors. The overall level of consumer finance penetration and composition is key -- countries with a high proportion of short-term debt are more susceptible to consumer finance crises.
For instance, in Korea in 2002, credit card receivables were at 30 per cent of GDP compared to less than 10 per cent in developed markets. Cash advances were over 50 per cent of total card transaction volume.
Servicing short-term debt of this magnitude at interest rates up to 20 per cent sparked a crisis.
Macro-economic factors have also often contributed -- asset pricing bubbles and changes in interest rates can suddenly depress or increase growth rates, sometimes triggering a crisis.
Despite increased consumer finance activity the consumer finance market in India is in early stages of evolution. Total consumer credit to GDP is at about 4 per cent compared to over 60 per cent in Hong Kong, 55 per cent in Malaysia and 25 per cent in Thailand.
Further, over half of the consumer finance balances in India are already in mortgages, which are lower risk and longer tenor. Share of short-term credit in India like credit card receivables is 0.1 per cent of GDP, compared to 4 per cent in Hong Kong, 3.1 per cent in Malaysia and 1.3 per cent in Thailand.
This is an entirely healthy and normal development along the "S curve".
Further, consumer finance growth is fuelling overall economic growth. However, the consumer finance opportunity requires new skills within the financial sector to assess risk. Credit information and models have to be leveraged to ensure that credit is given to the right individuals.
Banks that enter this arena without having built their risk management processes will face increased credit losses over time and could trigger mini-crises.
There is a need for only limited and focused direct interventions in the Indian consumer finance market. The credit bureau initiative requires continued focus from the regulator, and banks should be encouraged to use the information in their credit scoring process.
Individual banks need to make sure that they have developed the requisite skills before they enter this market. This would involve building retail credit models, developing efficient and effective credit and recovery processes and managing operational risks.
In parallel, consumer finance should be encouraged to contribute to economic growth and deepening of financial markets. An over-reaction would cost the economy dearly -- we need to pull out weeds, not dig up the garden.
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