India faces own subprime crisis as personal loan failures climb
By Joe Leahy in Mumbai
Published: March 13 2008 02:00 | Last updated: March 13 2008 02:00
India is beginning to experience its own domestic subprime crisis as banks
tighten lending procedures to try to curb rising delinquencies,
particularly
in small unsecured personal loans.
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 unsecured personal loans.
Overall loan growth in India, which has been on a downtrend since peaking
at
almost 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
include
credit cards and micro "small ticket" loans. The small ticket loans form
what analysts have loosely labelled India's "subprime" segment.
"The balance sheet is still performing well but delinquencies [of personal
loans] have been higher than one would have anticipated," said Sanjay
Nayar,
chief executive of Citigroup in India.
Citigroup does not disclose details of its non-performing loans in India
but
Mr Nayar said it was rejigging some of its operations to better target
India's emerging middle cl*****.
While the growing defaults in small ticket loans have only a marginal
impact
on overall credit quality, they have scared Indian banks into becoming
more
conservative about their lending on the basis of reduced expectations for
economic growth. Some had hoped that India's gross domestic product growth
would exceed 10 per cent, but 8-9 per cent is now looking more realistic.
ICICI, India's largest private bank, withdrew 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).
V. Vaidyanathan, executive director of ICICI Bank, said this business was
still performing strongly, although global credit tightening and ICICI's
own
analysis had led it to become more cautious about lending in general.
"It's
better to be conservative," he said.
Small loans turn sour, Page 6
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