Retail loans drive growth in credit penetration

Access to finance is one of the most fundamental requirements for the development of an economy and its people. In today’s world, thanks to institutionalised credit, we now have structured and regulated credit opportunities available for building assets, educating our children and aspiring for economic as well as social growth. Our country has experienced a revolution of sorts in retail credit over the last decade. Finance is available to individuals faster and easier than ever before. The Indian Banking 2020 Report by the Boston Consulting Group indicates that retail banking will benefit immensely from the Indian demographic dividend. Mortgage loans will grow fast and will cross Rs.40 trillion by 2020.

Catalysts of growth: Retail credit has seen a surge in uptake and the trends prove it. Credit Information Bureau Limited (CIBIL) data analysis indicates that over the past five years—fuelled by a growing demand from metros as well as Tier-II and Tier-III cities—retail credit demand has grown exponentially. This demand registered a healthy 25 per cent rise in FY15 compared to the previous year. Some of this can be attributed to growing financial awareness among consumers. Today, a rising number of consumers are conscious about their individual CIBIL Report and credit score, and understand how significant it is for the approval of their loan applications. For the credit sector, this is a positive sign as it has resulted in significant reduction in the number of retail delinquencies. Lenders are now better placed to understand the credit behaviour of the borrower across various parameters—past performance, credit type, credit exposure and credit utilisation, among others.

Top states: Interestingly, the top five states— Maharashtra (17 per cent), Tamil Nadu (10 per cent), Andhra Pradesh and Telangana (9 per cent), Gujarat (8 per cent), and Karnataka (8 per cent) together contribute 55 per cent of the country’s credit demand. From the retail perspective, auto and personal loans have been finding favour with consumers across the country in the past few quarters.

India is a young nation, with over 65 per cent of its workforce under the age of 35. Understandbly, the demand for home loan is growing and this can be attributed to the young working population and their associated aspirations. In FY15, more than 40 per cent of home loan borrowers were less than 35 years of age, compared to 30 per cent five years ago. It has been observed that a majority of enquiries for home loans originated from the bustling metro cities of Mumbai, Delhi, Bangalore and Pune.

Cashless transactions: Though Indian consumption is cash dominated, the increasing use of credit cards reflects a bigger shift, with the nation steadily moving from a cash-based to a cash-independent economy. Credit cards are increasingly sought after, owing to simple and secure payment processes and faster adoption of digital payments. CIBIL data points out that over 8 lakh new credit card accounts were opened in Q12014. The number was at 10.8 lakh by Q12015. Maximum numbers of credit card applications come from Mumbai, followed by New Delhi and Bangalore. Furthermore, the delinquency rate has more than halved at 1.06 per cent since 2010. The plunge in the delinquencies could be attributed to the availability of credit information insights on the borrower’s financial behaviour, which assists financial institutions to make a prudent lending decision.

Education loan demand surge: Another area that draws attention is education. Soaring educational costs and the permeating specialisations across various fields have encouraged the trend of borrowing for education. The average sanctioned education loan amount continues to grow over time. Average sanctioned amount in Q42014 was Rs.6 lakh compared to about Rs.4.5 lakh in Q42013. Of late, loans lower than Rs.1 lakh have reduced below 10 per cent of total sanctions while loans with ticket size amount of more than Rs.5 lakh have gone up to almost 30 per cent of the total sanctions.

Boosting entrepreneurship: The small scale entrepreneurship spirit received a renewed thrust with the government directing banks to distribute loans amounting to Rs.1.22 trillion under the Prime Minister’s Mudra Yojana. This move is intended to provide easy access to finance for small and budding entrepreneurs and job creation. For quick receipts of the loan disbursements, it is imperative to maintain a healthy CIBIL Report of the individual, as well as the entity. CIBIL Commercial Bureau maintains 23 million commercial credit records, including over 11 million commercial entities. States like Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka, West Bengal, Delhi and Uttar Pradesh dominate with 64 per cent of all credit facilities reported to the CIBIL Commercial Bureau. It has also been observed that private sector and MNC banks have a significant presence on commercial lending in Maharashtra, Tamil Nadu and Karnataka, compared to national average.

Several World Bank reports and case studies have time and again shown that credit information sharing through credit bureaus like CIBIL expands access to credit and drives sustainable credit penetration. It improves loan performance by reducing delinquency rates and containing NPAs. Credit penetration is achieved by significantly identifying ‘good borrowers’ (low credit risk) that otherwise would have been misidentified as ‘bad borrowers’ (high credit risks) and, therefore, would have been denied credit. At the same time, bad risks now have credit denied to them or are no longer subsidised by lower-risk individuals. In the aggregate, lending is increased, leading to greater economic growth, rising productivity and in turn greater financial inclusion.

Harshala Chandorkar Chief Operating Officer, CIBIL

The writer’s views are personal and do not represent those of the company

olmdesk@outlookindia.com