1. Retail Finance
Presented by
R.C.JOSHI
1

2. RETAIL FINANCE
• Retail Banking has emerged as a new buzzword.
• Earlier retail banking was limited to accepting
deposits from individuals and give them certain
services like safe custody remittances etc
• Retail banking had widened its scope and secured a
prominent side in the asset portfolio of the balance
sheets of Banks.
• Banks offer wide range of new loan products to their
retail customers.
• The phenomenal changes have made banks to
change their business strategies.
2

3. Why Retail Finance?
…. A glimpse of the past
 LPG - Liberalization Privatization Globalization
 Cheaper avenues of credit to corporate and
Corporate are keen on cost reduction
 Poor demand for corporate credit in the last few
years. (Now the demand for credit from corporate
are increasing)
 Reduction in CRR from 15% as of 1.7.89 to 5.0%
as of 2.10.2004
 Reduction in SLR from 38.5% in Feb, 1992 to
statutory minimum of 25%in Oct, 1997
3

4. Why Retail Finance?
A glimpse of the past
• The late 90s witnessed Global Recession.
The Banking industry and Financial
institution carried huge level of NPA with
them.
• Major industries which are recovering in
the past couple of years are still under
difficulties
4

5. Why Retail Finance?
Overview
• Cap in the call money market lending(RBI
stipulates that it should not be 25% of its owned
funds)
• De regulation of rates of interest
• Reduction in Bank Rate (at present 6%)
• Enhancing cap of P/S lending Housing finance up
to Rs. 15 lakhs irrespective of location can be
treated as a P/S advance .
• Minimum Maturity of commercial papers lowered
to 7 days from 15 days.(CP 104848 crores July 04
and rate offered is at 4.61-5.60% 5

6. Why Retail Finance?
Overview
• Global economic growth remained strong in 2004
It grew at 5% the highest rate for nearly three
decades.
• Shift in the pattern of GDP to Service sector
• India’s Manufacturing sector accounted for 21.8%
of GDP and service sector accounted for 56.1 %
GDP .
• GDP recorded a high rate of 8.2 % for 2003 –04
Second Highest in emerging market.
• Substantial Forex reserves
6

7. Why Retail Finance?
Overview
• The lower off take of credit in the non retail
sector
• The flow of credit to manufacturing sector
recorded lower growth during 2003-04 as
compared with 2002-03
• Industrial credit decelerated due to greater
dependence of large corporate on internal as
well as external Finance.
7

8. Why retail Finance?
Overview-2004 -05
• Liquidity conditions in various money markets remained broadly
stable during 2004-05
• The weighted call money market slightly up to 4.77% as against 4.37
% during 2004
• Cut off yield on Treasury bills increased to 5.66 % from 5.32%
• CP continued to remain vibrant .The weighted average discounted
rate moved up from 5.11% to 5.84%
• Buoyant exports emerged as driver of demand in large spectrum of
industries
• The robust macroeconomic environment continued to underpin the
financial performance of Indian Banks in 2004-05
8

9. Why Retail Finance?
Overview
• Bank’s credit posted a robust growth in 2004-05
and continues the same in 2005-06 also.
• Pick up by agriculture and industries for their
expansion paved way for this growth.
• The flow of Credit to other sectors including retail
sector retail sector recorded a stronger growth.
• Retail advances increased by 41.2 % (Rs. 77947)
crores in 2004-05 as compared with 27.9 % in
the overall loan and advances of SCBs
9

10. Why Retail Finance?
• The retail Banking mainly in the form of housing
and personal loans attracted an increasing share of
banks’ loan portfolio.
• Housing loans: This segment of retail Bank
portfolio recorded a growth rate of 42%for 2003-
04 . But it was lower by 13% points compared
with the growth of 55% in 2002-03.
• It has recorded the growth of 50.5% in the year
2004-05
10

11. Why Retail Finance?
Overview
• Retail Banking Constitutes 27.9% of the total
advances of the total outstanding as of March,
2005.
• The impaired assets are on the lower side( around
2%.)
• Across the globe retail banking does a remarkable
growth.
• This is the result of improvement in the
technology .
11

12. Retail portfolio of Banks (Rs. In crores ) RBI
Trend analysis
Item 2004 2005 % of
variation
Housing 89449 134653 50.5
Consumer durable 8256 3810 -39.1
Credit card 6167 8405 36.3
receivable
Other Personal loans 87170 120120 37.8
Total 189041 266988 41.2
Total Advances of 864271 1105725 27.9
SCBs 12

13. Show me the Money (Source ET 17/5/2005)
Rs. in Crores
Loan FY 2005 FY2004 FY2003
Category
Home 60000 47000 42000
Auto 29000 20000 19200
Personal 10500 10500 10200
Two 6500 3500 3600
wheeler
Auto loan market grown with rise in passenger car sales
13

14. Why Retail Finance?
• The leading players in the market are State
Bank of India (22% o f Total Credit )
• ICICI and other new generation Banks are
aggressive players in the market.
• Market penetration is quite high and market
potential is still vast.
14

15. Why Retail Finance?
• Positive Role of Government:
• Tax exemption
• Repealing of urban land Act in 1999.
• Soft corner for Housing –particularly for
Rural India
• Controlling inflation over the last two /three
years
15

16. Retail Finance
products
• HOUSING FINANCE
• MORTGAGE BASED FINANCE
• AUTO FINANCE
• CONSUMER DURABLES
• CREDIT CARDS
• ATM
• DEBIT CARDS
16

17. SCOPE FOR RETAIL FINANCE
• Emergence of middle class
• Middle class professionals are more of demanding
• Change in life style
• Increase in disposable income
• People prefer Small family
• Keen to have more comfort
• Demand for urban transport
17

18. Scope for customers
• Falling interest rates- Now interest rate is
firming up-
• Fixed or floating ? ?
• Hassle free credit
• Instant /immediate sanction
• Liberal terms for repayment
• Large number of players -much options
18

19. SCOPE FOR BANKERS
• Improves credit portfolio
• Increases volume of business
• Improves bottom line
• Low default rate
• Risk is spread
• Tie up with manufacturers
• Get other business
19

20. RETAIL FINANCE
-POTENTIALS
• Middle class is swelling – crossed beyond
500 million
• Market penetration is just 2% of GDP-in
USA50%
• Service sector contributes 56.1% of GDP
• Composition of rural population ( 85%
in 1950 to 65% in 02)
20

21. RETAIL FINANCE-
POTENTIALS
• Only 20 crores of population have bank accounts
• Consumer credit is low as compared to total
credit
• India is one among the top 10 -emerging market
• BRIC Nations
• Size of retail market is Rupees 50000 crores
• Rural Market potential is high
21

22. RETAIL FINANCE
POTENTIALS
• 75% OF MIDDLE CLASS HAS
HOSEHOLD INCOME OF above Rs.
50000
• GROWTH OF RETAIL CREDIT IS IN
2 FOLD SINCE 2001
• 50% OF INCREMENTAL GROWTH IS
FROM RETAIL SECTOR
22

23. Housing Finance
• Present outstanding(31/3/05) is Rs.
134653 crores
Impaired credit as percentage to
outstanding loan is only 1.9%
• Consumer’s average age is 31 years.
• Good start up salaries
• Aspiration for changes in life style
• Insurance cover for risks
23

24. Housing Finance
• Foreclosures are permitted
• Low or nil processing charges
• Interest on reducing balance method
• Choice for rate of interest(fixed or
floating)
• Income tax concessions(Rs. 1,50,000 for
interest and Rs. 20000 for principal )
24

25. Housing Finance
• Stiff competition/ interest war
• Supplements growth in infrastructure
industries.
• Transaction cost is low
• Appraisal is easy
• Budget support by the government
• Keen for improving rural housing ratio
25

26. Housing Finance
• Shortage of 24 Million dwelling units in rural area
Rs. 500 crores risk Fund for rural housing
proposed
• A separate National shelter fund again with Rs.
500 crores corpus is being proposed NHB will
issue tax free bonds to raise this fund
• This will increase housing finance companies
and banks to increase their lending to rural
housing. (present level is only 10% of exposure)
• Rural Housing Finance is suffering because of
uncertain repayment pattern
26

27. Housing Finance and Interest Rates
• The call rate is increasing.
• Market is volatile and banks have to look in to the
interest rate of housing loans.
• RBI Cautioning Banks about low rate of interest in this
area especially when the exposure of bank is increasing
year after year. ( aggregate housing loan credit is
compounding at the rate of 30%)
• Demand for industry raised by 17% in the last year. We
can not ignore their needs
• Home loan a relatively new credit instrument in the
country has become an important outlet for credit in the
past few years.
27

28. Housing Finance and Interest Rates
• The raise in housing loan not only helped
commercial banks to raise credit of take but
has also helped the bank to reduce the
magnitude of risk .
• Good number of accounts with low
exposure
• An increase of interest by 50 basis point
will fetch about 750 crores to industry
28

29. Housing Finance and Interest Rates
• HDFC and IDBI have raised the rate
• There is definitely a trend in upward movement
and can not be predicted – how long this ?
• The reactions of customers are different
• Banks normally do not change the EMI but allow
customers to repay the stipulated period .
• Many customers are contemplating to prepay the
loan amount
•
29

30. AUTO FINANCE
• Market size is Rs. 7500 crores
• Consumer’s average is 30.
• Finance is available for old cars
• Factors accelerate growth: low interest/
poor urban transport/increasing comfort
level.
30

31. Auto Finance
• Car makers to hike capacity by 44% in 2
years
• Demand at 2.24 millions will outstrip
supply by 20%
31

32. Feb16,2005
FE
32

33. PRESENT POSITION
• Car loan interest hit the north trail
• It is 9% for premium cars such as Optra, Ikon,
Accent , City , Corsa and
• 9.5% for small cars like Santro, Alto, Zen , Wagon
R and Indica
• Manufactures and dealers continue to offer
discounts to push volumes . Volumes have tapered
of this year Industry feel that the cost of funds are
increasing due to rising yields on securities
33

34. AUTO FINANCE
• ICICI holds lion’s share with a 40% market
share , followed by HDFC at around 15-18%
share . Foreign Banks go slow due to thin profit
margin.
• The new car finance market has grown 6.1 lakh
unit worth any where between Rs. 18000
crores to Rs. 23 000 crores in 03-04 according
to industry estimate
• 1,00,000 cars have been sold in Sep, 2005
• Special offers are given by dealers in festive
season 34

35. AUTO FINANCE
• Default rate is 1%-2%
• Liberal financing - increased production
• Sector offers immense scope
• Changes life style-(rent a car)
• Arrival of New cars and changes in the
existing models make people to go for
new cars
35

36. Consumer loans
What is this?
• Personal financial needs spring up out of no
where.
• To meet Emergency needs
• Public and private sector offers impressive
personal loans to meet such customers exclusive
financial needs
• A personal loan is a cash loan given with out any
collateral security and clean in nature
• The quantum is directly proportional /related to
the net income
36

37. Consumer loans
• Greater transparency
• Better documentation , easy and speedier
lending
• Attractive offers and affordable lending
rates
• Change in mind set up : From debt averse to
avail loan to fulfill their requirements
37

38. Consumer loans
• Per capita is growing at the rate of 3.2% pa
• Large number of persons are educated
(2001 census state literacy rate at 65%)
• Education makes people to compare and
make informed choices.
• They look beyond the local money lender
and go to banks
• Greater life expectancy
38

39. CONSUMER CREDIT AND
PERSONAL LOANS
• Market potential is Rs. 4000 crores
• Easy terms and conditions and hassle free
credit
• Simple and quick processing
• Demand is increasing and event bound
Example World cup, Olympics -Sale of colour
TV)
• 12 lakhs retail outlet
• Tie up with corporate/manufacturers
39

40. CONSUMER CREDIT AND
PERSONAL LOANS
• Further investments is expected at Rs.
30000 crs
• Foreign banks are pioneer
• Personal loans are unsecured but returns
are high
• The outstanding as of 31.3.2004 Rs. 6256
crores and NPA level is 4%. Impaired
credit is 6.3% of the total advances
40

41. CREDIT CARDS, ATM AND
DEBIT CARDS
• 10 million card holders from 10000 in
1980
• Potential is 40 mn
• Average spending is 18000 crores
• Payment habits changed.
• Cards are Acceptable at most of
places
• Plastic card will replace printed notes
41

42. CREDIT CARDS, ATM AND
DEBIT CARDS
• Rate of interest is 30 % to 36%
• Purchases can be made and paid in easy
EMI to suit Debit card 1 million users
• Volume of transaction in credit Card
and Debit cards are to the tune of
97.40lakhs and Rs. 86.37 lakhs
valuing around Rs. 35000 crores (for
2003-04)
• ATM gains popularity: reduces bank’s
operational cost
• SBI, ICICI, Citibank are leaders 42

43. RBIs trend analysis
• Commercial Banks have shifted their activities to
retail lending
• Retail Lending has become mainstay and a key
profit driver
• The overall impairment of the retail portfolio
works out to 2.5% and compares favorably with
gross Bank credit.
• ICICI Bank recorded 30% of growth followed by
SBI 20%
• Expressing concern over growth rate RBI has
increased Risk weights on Housing and Personal
loans
43

44. WHAT BANKS SHOULD DO
• Improve new skills and technology
• Prepare for soft interest regime
• Develop new products
• Customer centric
• Aggressive marketing
• Redesign/ reorient existing products by
periodical review of products
44

45. WHAT BANKS SHOULD DO
• Be prepared for competition
• Improve technology
• Cross sell products
• Effective CRM
• Combine different services in one bundle
• Think big to achieve big things
45

46. APPRAISAL OF PROPOSAL
• Identify the genuine borrower.
• Scrupulously follow KYC Norms
• Ascertain income
• Examine repaying capacity in line with
the bank’s policy
• Conduct pre inspection and post
inspection
46

47. APPRAISAL OF PROPOSAL
• Ensure adequate cash flow is available
• Obtain securities as specified
• If any deviation in the proposal obtain
permission from higher up
• Ensure effective monitoring
• Use Risk Management tools
47

48. MONITORING
• Each bank should evolve risk
management strategy
• Sound credit appraisal
• Proper documents
• Effective collection mechanism
• Effective recovery management system
48

49. MONITORING
• Use credit scoring system. It is a statistical
number that indicates the level of risk
associated with the borrowers. 90% of the
credit card and mortgage lenders in USA uses
this type of systems
• Effective use of securitisation and enforcement
of security act-2002
• Monitoring of large volume of accounts is
difficult.
• Constant monitoring on housing loan
• Use end gap method 49

50. MONITORING
• Understanding the circumstances of
default
• Restructure wherever needed
• Prevent the account from slippage
• Frequent interaction with borrowers
50

51. REMEMBER
RETAIL FINANCE
HAS
COME HERE TO STAY
AND WE HAVE TO LIVE
WITH IT
AND PROSPER WITH IT
51