Retail Loans? The Indian payments market is interesting to watch for three reasons:
1. The market is massive and rivals China;
2. Ironically, so much of the worlds technical output and customer interaction gets outsourced to the country, but their financial system is relatively primitive;
3. The country realized its lagging nature and began a massive effort to modernize about eight years ago. One of the most important facets of modernization was to tackle a census for the 1 billion population and to create a numbering system similar to the Social Security number so that a credit bureau processing function could come to fruition. How will this affect retail loans?.
This is the second go-round. The wheels fell of the first effort to modernize, which was timed right before the global financial crisis in 2008-9. We’re rooting for them because this market has the potential to be huge, and create aspirational, innovative products. But as with anything, if you do not control growth, this can fail miserably.
• The share of unsecured retail loans, including credit cards, to Indian banks’ total retail book is at 28%, its highest level since Reserve Bank of India (RBI) began releasing disaggregated credit data in 2007.• This should send off warning signals to banks and it has begun to do so, at least to the RBI.
• The central bank’s deputy governor S.S. Mundra recently noted that banks should not be pursuing the retail borrower at all costs.
There are about 64 Indian Rupees (Rs) to the US dollar so when the central bank starts projecting compounded growth rates of 17% over 3 years, scaling up to 4.5 trillion Rs are in play for unsecured lending.
• And the retail borrower looks to be the answer as extracting repayment from individuals is far easier than from a company during times of default.
• Perhaps lenders are becoming smug in their retail business and need to look back to 2008, when credit card defaults had risen sharply, to understand that all retail lending is not secure.
Definitely a market to watch, not just for the volume but to see how people who have been building (and rebuilding) major systems, along with servicing millions of calls, will develop their own financial technology.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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