Sub-prime assets at 7% of retail loans in India, says Crisil

January 08, 2008: There has been some deterioration in the asset quality of retail loans in India in recent times because of increasing exposure to higher risk customers and rising interest rates, according to a latest study by CRISIL Ratings. The gross non-performing assets (NPAs) in retail loans, which increased to about 2.7 per cent as of March 2007 from about 1.7 per cent as of March 2005, are likely to rise to 4 per cent over the next two years. However, the situation will remain manageable because secured loans such as mortgage and vehicle loans account for 80 per cent of lenders’ retail loan portfolio.

The increasing exposure to higher risk customers is mainly through personal loans and credit card receivables. These are unsecured and accounted for 17 per cent of total outstanding retail loans in March 2007, up from 6 per cent in 2004, the study pointed out.

According to CRISIL’s Managing Director and Chief Executive Officer, Ms. Roopa Kudva, “As competition has increased, players in retail lending, in their quest for growth and improvement in profitability, are reaching out to hitherto untapped clients, such as the self-employed and borrowers from smaller cities. This has increased lenders’ exposure to risk.”

While expecting this trend to continue, CRISIL believes that a reasonable definition of ‘sub-prime’ in the Indian context could include small-ticket personal loans that are given to low-income customers, and a portion of credit card receivables. Adds Ms. Kudva, “Going by this definition, sub-prime assets are still relatively low at 7 per cent of total outstanding retail loans. We estimate the loss levels in this segment to be currently at 7 to 9 per cent, and expect them to increase to 10 to 13 per cent over the medium term. However, delinquencies across retail asset categories have gone up and are likely to increase in 2008-09.”

Housing loans constitute over half of the total retail loans. Gross NPAs in home loans increased to 2.2 per cent in March 2007 from 1.8 per cent in 2005; these are expected to increase to 2.7 per cent in financial year 2008-09. Car and commercial vehicle asset segments comprise one-third of retail loans. CRISIL estimates that gross NPAs in these segments have increased to 2.3 per cent and 4 per cent as of end March 2007, from 0.9 per cent and 3.2 per cent, respectively, in 2005. In 2008-09, these numbers are seen at 3 per cent for car loans and 5.5 per cent for commercial vehicles.

According to Mr. Raman Uberoi, Senior Director – Ratings, “September-October 2007 saw a spike in delinquencies because of the slowdown in recovery efforts, following the controversy over the recovery methods of some lenders. Lenders have now taken welcome steps, such as increasing the use of technology in collection and recovery, and training collection agents to overcome the problem.” A possible fallout of the controversy could be that some players exit small-ticket personal loans. Adds Mr. Uberoi, “The exit of players could drive lower income borrowers to seek recourse to money lenders, which will be detrimental to the policy goal of seeking larger financial inclusion.”

( This is press release of Crisil)

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