1

Retail Finance

Presented by

R.C.JOSHI

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.

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

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

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%

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

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.

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

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

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

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 .

12

Item 2004 2005 % of variation

Housing 89449 134653 50.5

Consumer durable 8256 3810 -39.1

Credit card receivable

6167 8405 36.3

Other Personal loans 87170 120120 37.8

Total

Total Advances of SCBs

189041

864271

266988

1105725

41.2

27.9

Retail portfolio of Banks (Rs. In crores ) RBI Trend analysis

13

Show me the Money (Source ET 17/5/2005)

Loan FY 2005 FY2004 FY2003

Category

Home 60000 47000 42000

Auto 29000 20000 19200

Personal 10500 10500 10200

Two wheeler

6500 3500 3600

Rs. in Crores

Auto loan market grown with rise in passenger car sales

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.

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

16

Retail Finance products

• HOUSING FINANCE

• MORTGAGE BASED FINANCE• AUTO FINANCE• CONSUMER DURABLES• CREDIT CARDS• ATM• DEBIT CARDS

17

SCOPE FOR RETAIL 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

18

• 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

Scope for customers

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

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)

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

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

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

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 )

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

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

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.

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

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 •

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.

31

Auto Finance

• Car makers to hike capacity by 44% in 2 years

• Demand at 2.24 millions will outstrip supply by 20%

32

Feb16,2005 FE

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

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

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

36

Consumer loansWhat 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

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

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

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

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

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

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

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

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

45

WHAT BANKS SHOULD DO

• Be prepared for competitionBe prepared for competition

• Improve technologyImprove technology

• Cross sell productsCross sell products

• Effective CRM Effective CRM

• Combine different services in one bundleCombine different services in one bundle

• Think big to achieve big thingsThink big to achieve big things

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

47

APPRAISAL OF PROPOSAL

• Ensure adequate cash flow is availableEnsure adequate cash flow is available

• Obtain securities as specifiedObtain securities as specified

• If any deviation in the proposal obtain If any deviation in the proposal obtain permission from higher uppermission from higher up

• Ensure effective monitoring Ensure effective monitoring

• Use Risk Management tools Use Risk Management tools

48

MONITORING

• Each bank should evolve risk management strategy

• Sound credit appraisal

• Proper documents

• Effective collection mechanism

• Effective recovery management system

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

50

MONITORING

• Understanding the circumstances of default

• Restructure wherever needed

• Prevent the account from slippage

• Frequent interaction with borrowers

51

REMEMBERRETAIL FINANCEHAS COME HERE TO STAYAND WE HAVE TO LIVE WITH ITAND PROSPER WITH IT