Retail borrowers shy away, corporates’ offtake strong

CHENNAI: A leading MNC bank is offering complimentary air tickets for its ‘Platinum personal loan customers' who borrow up to Rs 15 lakh. Several banks are promising attractive options and freebies for retail borrowers . With high interest rates putting off potential borrowers, banks are increasingly resorting to novel techniques to win over customers for personal loans.

This comes at a time when growth in retail lending slowed down to 15.9%, the lowest in nearly four years, for the year ended May 2008, according to latest data.

The year-on-year (y-o-y ) credit growth, which stood at a heady 44.4% for March 2006, declined sharply even as the Reserve Bank of India (RBI) raised key rates in an attempt to rein in double digit inflation. The deceleration was led by the housing sector which saw a mere 13.8% growth in credit for the year ending May 2008. Real estate credit (loans taken by realty firms) grew 31.9% for the period compared to 100.6% for the year ending March 2006.

"Banks have now become cautious. Lending norms have become stringent. High rates are turning away potential customers," admits an official with a leading private sector bank. However, growth in industrial credit still remains strong and increased 26.9% for the year ending May 2008. This is higher than the growth registered for fiscal 2007. "Corporates who are confident about their future are not postponing investment plans," reckons N Kamakoti , executive director City Union Bank (CUB).

"Though the outlook for the corporate sector is not as bright as in the beginning of the year, it still remains positive ," says D K Srivastava, director, Madras School of Economics (MSE). He, however , believes that the high interest will impact corporate credit growth in the next two quarters.

"With falling earnings growth, firms have lower retained earnings and are now substituting bank finance for internal resource generation ," says Mridul Saggar, chief economist, Kotak Securities . Due to the credit crunch in global markets following the US subprime crisis firms are also substituting external commercial borrowings with bank credit. "This has pushed credit growth to industry higher than it otherwise would be. Higher global commodity prices have also contributed to higher credit requirements for working capital."

According to RBI's prepolicy document, credit growth in the form of personal loans has decelerated to about 16% y-o-y .