Acceleration, Deceleration & Moderation in the growth of retail credit in India
PGP RAK, IIM INDORE
Retail banking is the mobilization of deposits, lending and provision of financial services by a bank in the retail segment which results in fee-based income. Retail lending has been a great innovation across the globe in the commercial banking sector in recent years. Lending is not a new concept- it has been there for many years. Similarly retail deposit is also not a new concept. But retail lending is the new sector on which banks are concentrating now. Retail lending has seen different phases in its lifetime, since the liberalization of India in 1991. Both private and public sector banks, irrespective of size have been increasingly focusing on retail segment for both resource mobilization and lending. Banks are now the primary source of retail lending, a position previously enjoyed by NBFI’s. The surge on retail loans was largely on account of increasing liquidity due to the reduction in CRR/SLR over the years, increasing autonomy with respect to product innovation, reduced dependency on corporate customers. The demand side growth drivers such as increasing disposable income, enlarging middle class, increasing population of young people, changing attitude of customers towards loans etc. also were positive for the retail banking sector.
Acceleration, Deceleration & Moderation
The growth in retail credit in India went through a lot of tough times. Prior to economic reforms in 1990, most of the banking credit was focused on agriculture, industry and commerce. Various regulatory restrictions were in place in order to ensure limits on total amount of housing loans and loans to individuals. There were other restrictions related to rate of interest, margin stipulation and maximum repayment period. After the economic and regulatory reforms were made, 3 distinct phases in the growth of retail assets have been observed. a) Acceleration Period (1996-97 to 2005-06)
b) Deceleration Period (2006-07 to 2009-10)
c) Moderation Period (2010-11 onwards)
The table below is from CMIE Database, Economic Intelligence Service. It shows the variation in retail credit from Mar’96 to Mar’10. The total SCB’s credit by bank groups in India for Personal loans has been given in Rs. Crores | Mar’96| Mar'97| Mar'98| Mar'99| Mar'00| Mar'01| Mar'02| Mar'03| Mar'04| Mar'05| Mar'06| Mar'07| Mar'08| Mar'09| Mar'10| Personal loans| 23628| 28201| 34752| 39589| 51638| 65940| 82518| 113941| 179087| 255981| 353225| 433562| 485415| 553546| 558894| %growth| | 19%| 23%| 14%| 30%| 28%| 25%| 38%| 57%| 43%| 38%| 23%| 12%| 14%| 5%| As we can see from the data, the growth in retail credit experienced a surge during the acceleration phase and then mellowed down until Mar’2010. At present, all banks are in the moderation phase and are maintaining around 20% growth in retail assets. The graph below shows the various stages of growth in retail credit from 1997 to 2011. It is also from CMIE Database, Economic Intelligence Service.
The acceleration phase was from March 1997 to March 2006. During this period, retail credit grew at an average annual growth rate of 28.4% against 19.5% growth of the overall bank credit. The key characteristics of this phase are low risk perception of banks, deregulation and increased autonomy, competition, liquidity in market due to positive economic indicators. During this period, the share of retail loan to total bank loan went up from almost nil to around 25%. It is also worth observing that during this phase, the percentage contribution of housing loans to total retail loans increased from 37.3% in March 1993 to 51.6% in March 2006. Moreover, the share of foreign banks also increased from 8% in 1996 to around 20% in 2006. This was primarily due to the growth story...