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Thursday, March 13, 2008

The Slowdown in India Bank Lending

Joe Leahy has an article on this interesting topic in the Financial Times this moprning. He suggest India is beginning to experience its own version of a credit crunch as banks tighten lending procedures to curb rising delinquencies, particularly in small unsecured personal loans. He argues that India’s financial system has so far been spared much of the pain of the global subprime crisis because of the relatively small size of its banks and their conservative investment focus overseas.

But persistent inflationary pressure has forced the Reserve Bank of India, the central bank, to keep interest rates high, which in turn has hit retail credit, from home loans to car and personal unsecured loans.

Overall loan growth in India, which has been on a downward trend since peaking at nearly 40 per cent in early 2006, has slumped to about 20 per cent this year due to real lending rates that are among the highest in Asia at about 7 per cent, according to Credit Suisse.

The slowdown has been felt most acutely in what was formerly one of the sector’s fastest growing segments – personal unsecured loans – which includes credit cards and micro “small ticket” loans. The small ticket loans form what analysts have loosely dubbed India’s “subprime” segment, although unlike in the US, these borrowers are low-income earners – blue collar workers and self-employed traders – and not people with a poor credit history.

However, while the growth in defaults in small ticket loans has only had a marginal impact on overall credit quality, it has scared Indian banks into becoming more conservative about their lending. This has led to a tightening in consumer loans across the board and taken some of the gloss off India's economic outlook on the basis of reduced expectations for economic growth.

I had previously taken the view that India’s gross domestic product growth might well exceed 10 per cent in the near future, and I still hold to that view, but over the coming 12 to 18 months figure of 8-9 per cent is now looking more realistic. Should we call this a "mini recession" or simply a growth slowdown?

ICICI, India’s largest private bank, withdrew altogether from small ticket lending six months ago and now only provides credit to the “prime personal loan” segment, or facilities above about Rs100,000 ($2,500, €1,600, £1,200).

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