Though the Indian financial sector does not have a sub-prime market, retail lending has increased by more than 30 per cent year-on-year between March 2006 and March 2007, underscoring need for a caution, an Assocham Eco Pulse (AEP) study has shown.

As per the AEP study on ‘retail lending’, ICICI Bank’s retail advances increased by 39 per cent as on 31 March 2007, constituting 65 per cent of advances. Centurion Bank of Punjab has focused on the growth of retail business, with its retail loans accounting for 68 per cent of net advances. Punjab National Bank’s retail credit constitutes 22.7 per cent of its net credit. Retail loans of State Bank of India constitutes 21.50 per cent of its total loan book.

“In the backdrop of increased focus on retail strategy and volatility of the financial markets, the Indian banks need to be more cautious while making disbursements in the retail sector.
They would do well to closely monitor their personal loan portfolios,” Assocham president, Mr Venugopal Dhoot, said.

Rising competition has seen over leveraging of customers, which along with rising rates may cause a rise in defaulters. Even though this market is nascent, it is one of the fastest-growing loan segments. Unlike in the US, there is no sub-prime market in India.
The US sub-prime market consisted primarily of people with little or no credit worthiness, most of them charged to sub-prime borrowers being mortgage loans. US sub-prime mortgage crisis began in late 2006, when thousand of borrowers defaulted in payments.
As a result, many lenders had to file for bankruptcy, leading to a direct impact on US housing market and the economy as a whole.

In India, the lower end of the personal loan market may be considered a segment carrying some of the risks attached to the sub-prime. Most customers in India are first-time borrowers from the organised market, and hence, have no credit history.
The AEP study found that big personal loans with an average size of around Rs 90,000 are given to more established individuals at lower rates of 14-28 per cent against the 30-55 per cent level.
Competition in India’s personal loans market has increased with the entry of multinationals, private banks and non-banking finance corporations (NBFCs). Citi Financial and GE Money are the oldest players in this market. However, in recent times, companies like ABN Amro, Centurion Bank of Punjab, HDFC Bank, HSBC, ICICI Bank, DBS Cholamandalam, Fullerton India and Religare have been increasingly focusing on the personal loan.
In most cases, the sub-prime market for these players constitutes somewhere between 5-20 per cent of the monthly disbursements.

Though some players like Citi Financial and Fullerton go through a personal screening of customers, this is not a practice being followed by everyone. Therefore, even though, India is not exposed to sub-prime lending, the likely recession in the US market may affect the entire world economy. Indian stock market is showing a downward trend in line with the global markets as the prices of Indian shares, corporate bonds and real estate are decreasing.

Most of the commercial banks have focused on retail lending by registering an increase of about 32 per cent with a subsequent reduction of 13.75 per cent in their NPAs on a year-on-year basis during the financial year 2006-07.