The asset quality of retail loans in India is deteriorating because of increasing exposure to higher risk customers and rising interest rates. The gross non-performing assets (NPAs) in retail loans, which increased to about 2.7 per cent as of March 2007 from about 1.7 per cent as of March 2005, are likely to rise to 4 per cent over the next two years, as per Crisil figures. However, the situation will remain manageable because secured loans such as mortgage and vehicle loans account for 80 per cent of lenders’ retail loan portfolio. The increasing exposure to higher risk customers is mainly through personal loans and credit card receivables.

According to Crisil MD and CEO Roopa Kudva, as competition has increased, players in retail lending are reaching out to hitherto untapped clients, such as the self-employed and borrowers from smaller cities. This has increased lenders’ exposure to risk. While expecting this trend to continue, Crisil believed that a reasonable definition of ‘sub-prime’ in the Indian context could include small-ticket personal loans that are given to low-income customers.

Crisil estimates that gross NPAs in these segments have increased to 2.3 per cent and 4 per cent as of March end 2007, in 2008-09, these numbers are seen at 3 per cent for car loans and 5.5 per cent for commercial vehicles. According to Raman Uberoi, senior director - Ratings, September-October 2007 saw a spike in delinquencies because of the slowdown in recovery efforts, following the controversy over the recovery methods of some lenders. A possible fallout of this controversy could see some players exit small-ticket personal loans.

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