India’s retail lending market has significant growth potential as the country continues modernizing its financial infrastructure and expanding access to credit. Improvements in consumer identification, credit reporting, and financial technology have created opportunities for banks to serve a much larger population of borrowers and develop new lending products.
However, rapid growth in unsecured retail loans also introduces substantial risk. As credit cards and other forms of unsecured lending account for a greater share of banks’ retail portfolios, financial institutions must balance growth opportunities with disciplined underwriting and risk management. India’s previous experience with rising credit card defaults demonstrates why lenders must carefully manage expansion even as the market becomes more accessible.
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.
The growth of retail lending in India presents an enormous opportunity for banks, fintechs, and other financial services providers. A large population combined with a modernizing financial infrastructure could support substantial innovation in consumer credit and other financial products.
At the same time, rapid expansion in unsecured retail loans requires caution. Strong growth rates can quickly create credit quality problems if lenders prioritize customer acquisition over responsible underwriting. How Indian financial institutions balance innovation, financial inclusion, and credit risk will help determine whether the country’s expanding retail lending market develops sustainably.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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