Loans Are Based On Salary Levels

Updated: Sep 29 2004, 05:30am hrs
Retail finance has emerged as a key driver to consumption-led growth in the Indian economy and has seen annual growth rates of over 30% in the past four years. This momentum is expected to continue, leading to questions on its sustainability, as well as worry on whether Indians are borrowing too much. While there is no direct data, our analysis, based on macro and micro data and observed consumer behaviour, suggests the retail finance phenomenon here is broad-based, driven by fundamental growth factors and without any concentration risk.

The retail finance market, Rs 150,000 crore this year, is 6% of Indias GDP. The corresponding number for peer countries in South East Asia and most of the developed world is 20% or higher, so theres a lot of scope to grow further. Also, the growth in retail finance seems firm, with increasing affordability and accessibility. Interest rates on retail loan have declined substantially in the past four-five years and coupled with increasing salaries, it is enabling consumers to borrow more. According to a recent analyst report, owing to the reduction in interest rates, the number of eligible customers who can take a Rs 3.5 lakh home loan has jumped from 5 million to 20 million in just five years!

Indian demographics support this growth. With almost 55% of Indians in the working age (15-54 years), the market is assured of a very large and growing target consumer base for years to come. Then there is the growth pattern of retail finance. It is spread across India. Today, more than 50% of ICICI Banks incremental retail loans are from non-metros. There are new markets and new customers: home loans, car and two-wheeler loans and other personal ones are easily available in 400-500 cities across the country.

No Worrying Excesses
At the macro level therefore, the retail finance market is neither saturated nor concentrated. At the micro level, lending practices and consumer behaviour reaffirm this. Most lenders today determine borrowing capacity based only on current income/salary levels. Further, any fresh loan is given after checking existing obligations and repaying capacity. Hence, there is little scope for borrowing beyond the known means of repayment.

We have also observed a sustained propensity among our borrowers to prepay their loans. The average contracted period for home loans is 12-13 years in India, but average repayment is only 8-9 years. Indians typically utilise salary increases and year-end bonuses to pay off their loans. Given all these factors - an unsaturated market, a macro environment facilitating growth of retail finance and the conservatism of borrowers and lenders, the Indian retail finance market seems set on a sustained and healthy growth path. And nowhere near the point of over-borrowing.

The writer is executive director, ICICI Bank