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Friday, October 17, 2003

Are You a Credit Risk?

Oooh, self abuse is taxing on the brain. I hope you will forgive me for coming back again. Especially since I have a horrible feeling Reuben is going to 'hit us with his rhythmn stick' some time this afternoon. I think Vivek is taking us in the right direction: What we need are some numbers up on the scoreboard, then we can do some calculations. (Incidentally there is no truth in the vilely slanderous rumour that I am only doing Indian blogging as an excuse to get back into cricket!). This time it's Morgan Stanley who have the lead. (and after this, I promise, I'm off with Uncle Vanya for a weekend in the country). In the meantime, c'mon folks, this can go a little further, bank retail loans to GDP at 3.5% is not the end of the world. In fact it's just the begining. Why this is the case I will explain, as they say, as time goes by.

ndian banks are rushing to entice the next household consumer to borrow for spending. In fact, it is not unusual for an eligible consumer to receive five telephone calls in a day from sales personnel trying to sell either a low-cost credit card, inexpensive housing loan product, car loan or an unsecured personal loan. There has also been a shift in the behavior of the Indian consumer. He is now more willing to borrow to spend unlike in the past. This has caused a consumer loan revolution, which had been evolving for a while now but is now gaining significant momentum (see our previous notes, Leverage Effect Driving Private Consumption, dated June 3, 2002, and What Is Driving Strong Retail Loan Growth, dated August 28, 2002).Even though the corporate credit growth has been decelerating over the last three years, retail loans continue to grow at a very high rate. Retail loans are estimated to have grown at the rate of around 45% in F2003 and 47% in F1H04. This compares with an average annual growth of 27% in three-year period of F2000-F02. Retail loans as a proportion of the GDP are estimated to rise to 7.1% by end March 2004 from 2.6% as of March 1999.What is driving this strong retail loan growth? We believe that there are two set of drivers: (1) on the supply side, the banks are getting aggressive in lending to consumers; and (2) on the demand side, consumers are shedding their inhibition against borrowing............

On the demand side, the culture of increasing consumerism and shortening consumer product life cycles is encouraging Indian households to leverage their balance sheets. Indian household balance sheets, which have traditionally been extremely underleveraged, are finally being geared up. The trend in credit-financed, two-wheeler purchases also reflects this change in consumer attitude. About 55% of the two-wheeler purchases are now financed through loans, compared with just 30% in F1999.This boom in retail loans is lending strong support to the overall growth environment. Incremental retail loans to incremental GDP is estimated to rise to 25% in F2004 compared with 3.5% in F1999. Incremental retail loans as a proportion of incremental private consumption are estimated to have risen to 11.8% in F2003 from 3.1% in F1999. Is this trend sustainable? Comparing India’s retail loan-to-GDP ratio with that of other Asian countries reveals that there may still be scope to increase the penetration of retail loans. For instance, the retail loan penetration for China is at around 12.5% and for other Asian countries in the range of 30-60%. We estimate that bank retail loans to household wealth is only about 3.5%. Banks could therefore still tap “able and willing” borrowers before they move down the income curve aggressively and raise a systemic concern about credit quality. However, the key challenge, we believe, is a possible revival in the corporate capex cycle. Combined central and state government borrowing has already reaching new highs as consolidated fiscal deficit is approaching 11% of GDP. Now even consumers are borrowing. A confluence of demand for funds from these three areas could mean pressure on liquidity and a possible rise in interest rates. This in turn could slow down retail loan growth. We believe that as long as interest rates do not back up more than 150-200 basis points over the next two-three years, retail loan growth should still be sustained at least at 20-25%.
Source: Morgan Stanley Global Economic Forum

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