Friday, November 30, 2007

Big players of private sector banks and foreign banks skip high-risk lending

The banks have been facing widespread activism from the customers, regulatory pressures and over leveraging by customers, on the issue of loan recovery, so they have back out themselves from high-interest small- ticket personal loans(STPL). The segment of STPL is the subprime category in India. With this the good olden days are back for the money lenders who charge at least twice the rate of these institutions.

The interest charged on the loans to the STPL segment range anywhere between 30-60% and the average ticket size of these loans is in the range of around Rs 25,000. Before the arrival of private sector banks in this segment, NBFCs were the bigger players in the formal segment.

Many of the big players of private sector banks and foreign banks- ICICI Bank, HDFC Bank, Centurion Bank of Punjab, Development Credit Bank and IndusInd Bank. Foreign NBFCs, including Citi Financial and others like Prime Credit of StanChart, which had in the recent past aggressively lent in this segment, have either pulled out or changed their lending strategies.

One of the major Indian NBFCs, which had made a big-bang entry, has also stopped lending STPL to this segment.

The big players like HDFC Bank have stopped giving oans above 30%, while others like ICICI Bank are now giving loans at only sub-20%. CBoP, which was testing the market trend for launching of its product, has also stepped back from it. Earlier, others like DCB and IndusInd Bank have also quit from the market.

Citi Financial, one of the oldest players in lending has seen a slowdown of around 20%. It has tightened credit norms and started credit counseling, consolidating loans even though it has increased its ticket sizes to around Rs 40,000 in metros. Others like Prime Credit are now offering loans of above Rs 50,000 only.

The negative stances on collection agents against the loan defaulters have affected most of these players. In some cases the bank employees have been charged for such stances with the result that employees are not very comfortable in going out to deal with customers. “Employees have been charged under IPC. This has, in fact, tainted their records,” points a senior banker.

In recent months consumer activism has resulted in rise in delinquency in some of the northern and southern markets like UP, Bihar, and Andhra Pradesh. A senior banker pointed out, “In some geographies, posters have been put up asking customers to call up senior police officials in case they feel banks are harassing them.

Some of the customers on the fringes have taken advantage of this change and are refusing to pay. Delinquencies, which were at around 7%, have now moved up to as high as 15%.” After such a widespread activism by the customers in cities like Mumbai, collection agents refused to do collection work in August and September. Though the situation improving now.

Some officials from regulatory agencies believe that banks are also responsible for such situation as they have doing aggressive lending and using unapproved methods for recovery. The higher margins enjoyed by some of the players led to the entry of a host of new players aggressively in the system.

A senior banker stated that players can make profit in this segment once they build up a strong and huge base along with delinquencies under control. As most of the customers do not have proper documentation, newer players used the payment history with existing players as a surrogate.

Customers started over leveraging themselves as they started to borrow from multiple players, thus leading to defaults.

In some of the cases, collection agents went overboard to recover these loans, which resulted in the recent backlash. Most banks have started offering loans above Rs 40,000 only. In other cases, senior bankers say that they have brought down interest rates, but have tightened credit norms.

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