Rise in Credit card due to loss in small ticket personal loans

A report by Crisil Ratings stated that loss levels in small ticket personal loans and a portion of credit card receivables, which are at present at 7-9 per cent, can rise to 10-13 percent in three years.

Describing this section as ‘sub-prime’ assets in the Indian context, the report stated that these are unsecured loans between Rs 5,000 and Rs 25,000-30,000. Out of the total credit card received, about 15-20 per cent comes in the profile of low income groups.

Mr Tarun Bhatia, Head, Corporate and Government Ratings stated that the total retail assets of the Indian banking industry are about Rs 4 lakh crore. From this the portion of the ‘sub-prime’ section is about 5 per cent or Rs 20,000 crore.

There was a sharp point of failure during September-October 2007 due to the slowdown in recovery efforts, following the controversy over recovery methods of some banks.

Mr Bhatia said that there will be a slowdown in this section and some banks might exit the small ticket loans segment in the future.

It is considered that the retail segment which saw a compounded growth of 30-40 per cent two years back, is likely to see a growth of 20-25 per cent this year.

Delinquencies across all retail assets are likely to increase.

An increase is expected in the gross NPAs in home loans, which comprises over half of total retail loans, to 2.7 per cent in 2008-09, from 2.2 per cent in March 2007.

Whereas the gross NPAs for car loans are likely to go up by 3 per cent (2.3 per cent) and for commercial vehicles it is likely to increase by 5.5 per cent (4 per cent).

The Public sector banks may see higher NPAs as their risk management systems and collection practices are not as effective as their private sector counterparts

Mr Bhatia said that PSU banks are getting into the retail asset classes without fully understanding it. As per now even that problem had been resolved to a large extent.

When asked about the profitability of banks, Mr Bhatia informed that it will remain under pressure and might see a fall of 15-20 basis points in 2007-08, because of high cost of deposit.

As most of the banks have taken advantage of the rising equity market and this would be reflected in their profits.

Mr Bhatia stated for the next six months a reduction in lending rates on the retail side is unlikely in the near term, as deposit costs are still high and the Reserve Bank of India too had not reduced rates.