Think retail, think detail: More calibrated retail banking growth ahead
Retail banking is showing early signs of stress, and growth may well have peaked
I have been a career corporate banker, but this isn’t the way forward anymore,” says Samit Ghosh, founder of Ujjivan Financial Services. It could be that he helms a small finance bank wired to cater to the unbanked in the smaller towns and cities. But what you can’t get away from is that retail banking has been the engine of growth for banks (of all hues) ever since toxic corporate assets came into full glare. But the retail party, too, may be winding down.
The latest data from Experian Credit Information Company India (for the period July’FY20) suggests that stress is building up in the personal and two-wheeler loan categories. The delinquency rate, particularly in the 30-day past-due (DPD) bracket, may indicate that a weak job market, and the economic slowdown are starting to pinch wallets.
Amber (not red) lights flashing
For Ashish Singhal, managing director of Experian Credit Information Company, the worry is the increasing trend of “loan stacking”, or the practice of availing a personal loan within a year of availing a secured loan. Given that secured loans are usually taken to buy a house or car, Singhal suggests that customers are perhaps picking a personal loan to meet near-term EMI obligations.
“These are the first signs of stress building up in retail loans”, he says. You also have increased demand for “pay-day loans” or loans against salaries. “It also indicates that in most cases, the borrower’s intention is to repay, but it is taking time,” adds Singhal; it perhaps also explains why the 90-DPD rate is lower than the 30-DPD.
And as far back as in June 2018, the Reserve Bank of India (RBI) in its Financial Stability Report (FSR), had more than hinted that trouble is rearing its head even in the most secured part of retail – home-loans. The FSR noted that gross the non-performing advances (GNPAs) ratio for housing finance assets went up to 1.51 per cent in FY18 from 1.28 per cent in FY17.
“Given the growing dominance of the retail housing segment in incremental credit allocations, any potential dilution in credit standards for incremental growth needs to be eschewed”.
Arjun Chowdhry, head of cards and unsecured lending at Citibank (India) is unlikely to tell you that the plot is changing, but admits: “In the current economic environment, all lenders must be proactive and should respond to changes in customer behaviour and the environment”. He does “not see any trends that are worrying as yet; we believe caution and a close watch on segment performance are prudent steps at this juncture”.
The retail party will do well to pay heed (and may well be doing so within banks) to another warning in the FSR – of the dangers associated with the use of technology. It observed that banks are increasingly leveraging technology to deliver retail services, and the significant buy-in from customers by their adoption of these delivery channels are anecdotally validated.
“The sharper increase in the number of frauds owing to card/internet banking related issues are pointers to the underlying vulnerability of the delivery channels.
Go slow and be careful was the underlying message from the central bank.
What’s on now
“The festive season demand has held up well so far. But how it will pan out in December needs to be seen,” says Pralay Mondal, executive director-retail banking at Axis Bank. It’s hard to buy into this view considering that malls weren’t brimming with business.
Nilufer Mullanfiroze, senior vice-president and country head (retail assets and cards) at Federal Bank, sees it differently: “The analogy that hotels are empty whereas Swiggy and Zomato are busy, applies to banks as well”.
What she means is that the demography of customers seeking loans, the products for which they require credit and, more importantly, the form in which they consume credit is vastly different from what it was a few years ago. “The introduction of EMI facility on debit cards gives customers the comfort to shop, and most of the sales generated is online”, she says.
While smaller than Axis Bank in size, Federal too, had invested organically in the retail business on reading the first signs of stress in corporate loans a few years ago. For both banks, the culture of cross-selling or harvesting the existing pool of customers to vend them more products and services has increased over the years.
A few points need to be made out here. There is no data in public domain on the cross-sell ratios of local banks, but it is surmised the best in class may be topping at 3; it will be some time before we catch up with the “six-plus” of a Wells Fargo in the US.
The larger point is that the growing realisation that cross-selling is a more effective manner to tap into incremental business, and by conserving capital at the same time.
Beyond visual range
Banks are forging partnerships with e-tailers, a strategy that would not only improve their digital footprint, but help create a database of customers typically outside the coverage of credit bureaus. Mondal says that Axis Bank’s tie-up with Flipkart for credit cards is helping its analytics’ engine address a larger ecosystem. “We get a new customer base. We will build this model in the next two-three years, and it will become a meaningful part of our overall portfolio,” he says.
While it may be too early to call out the retail credit quality, Mullanfiroze believes “it (such data) doesn’t stand very different from the clients rated well by the credit bureaus”, and adds “Relying too much on credit bureaus makes for lazy lending. Where there is a liabilities’ relationship with a customer who may be new to credit bureaus, we leverage on this profile to create a credit score. It may not be in the 800-points zone as the bureau data would be, but it’s not lagging the bureau score either”.
The nature of loans sought is also undergoing a massive change. Bankers say much of the demand is of late coming for the purchase of mobile phones, electronic appliances, and personal use products. “The demography of borrowers who have a need for loan is in the 20 to 30-years category, and the idea is to catch them young. When their aspirations increase, we would have established a relationship with them,” says Mondal. For Citibank, international travel and overseas spends have been key areas of customer spends this festive season.
But here’s the catch. Increased competition is already eating into the profitability of retail loans. With cost of funds increasing by 100 basis points, the yield on retail loans have also seen a compression, pointing to the fact that growing competition isn’t allowing banks to freely price products; and are forcing them to swallow the increasing cost of funds.
According to a banker, the blended retail yield has reduced to about 11 per cent in FY20 so far from the 12–13 per cent in FY19.
As for the retail party, it is winding down; just that it may not be so for individual banks, or in certain segments. “Growth in the retail space has peaked out in some sense,” says Mondal.
Most bankers agree with this view and believe that, going forward, growth would be more calibrated and measured.
The role of credit bureaus in profiling customers and improved internal rating system may also avert the retail credit turbulence seen in FY09. Threat or no threat, it’s time to turn cautious on retail loans.
After all, the devil may lie in the details.