Indian Banks Seek out Better Quality Customer
Last week we reported that Standard Chartered was no longer making unsecured loans to customers who were not long term clients of the bank. In fact as an external customer it is no longer possible to obtain a credit card or personal loan from the bank anymore. The bank wishing to improve the quality of its credit portfolio by providing loans to customers that have been with the bank sometime and whose borrowing habits and credit histories the banks is familiar with. The bank also increased the minimum annual income required in order to be eligible for a credit card. The reason for the change in strategy reported last week was the worsening of the banks unsecured credit portfolio. In their rush to stake a claim to market share, retail banks compromised on the credit quality of the customers that they were lending to, simply to be able to meet ambitious growth targets in their loan portfolio.
As default rates increased in the wake of high inflation and a global slowdown, banks and card issuers in India have begun the process of slowing down credit card issuance. It is estimated that the industries annual growth rate will fall by 20% to 25% by the end of 2009 from a growth rate of 30-35% which most banks have had as their targets over the last half decade.
It’s Not Money For Nothing
Higher delinquencies and defaults have prompted banks to now take a more cautious approach as far as lending is concerned, since this impacts directly on profitability. Banks are now increasingly looking at servicing the middle and high income groups to ensure repayment. In the past they were lending to anyone with a bank account that satisfied a very low minimum requirement for annual salary. This was a recipe for disaster, as banks lent to the very individuals who could not afford credit, or rather were not able to use credit responsibly. So on the one hand loan growth was growing quite nicely for the banks, whilst on the other, so too were the delinquent payments and defaults.
The Economic Times quoted Standard Chartered General Manager & head cards & personal loans RL Prasad as saying “Banks are becoming careful about unsecured lending at this critical juncture when the economy is slowing down and prices are moving northwards,”. He also added that the credit card division of Standard Charted will not be impacted as it caters primarily to the high and premium income groups.
American Express caters to what they also believe is the affluent segment of the market, customers whose annual income is above Rs 8 lakh or US$17,000 per annum. A spokesperson for American Express said that repayment is generally a problem only with lower-income groups.
Card Usage Changing in India
With the rise in inflation, interest rates on mortgages, car loans and personal loans have increased. This has shrunk the disposable income of consumers and boosted card usage in India. Credit Card usage in India has gone up significantly by as much as 15% over the last few months as consumers have shifted their cash purchases to credit cards in order to to defer payments.
Whilst average spending on credit cards is increasing, this also means that there will be an increase in the number of defaults as well. By the end of this financial year, the industry may witness some strain on specific categories in the months ahead.
According to the Economic Times, the default rate on Indian unsecured debt stands at around 7.5%-9% using data obtained from the Credit Card Management Consultancy. Consumers in India spend about Rs 4000 or US$ 86 a month on their cards. This is one of the lowest amounts in Asia. Especially low when you compare that spending, to what the average card holder spends in countries like China, Japan, Korea and Thailand. Indians buy just 1% of their total purchases using credit cards, whilst the world average stands at 9%. There are currently only 25 million credit cards in the country of which only 40% are active.
Banks fear that high inflation coupled with a slowdown in the Indian economy which could be an effect of the credit contagion will result in ever increasing default rates after having compromised on credit quality in the past. The strategy in place is to target mid income to wealthy clients who can afford to take on a bit of credit, will not have problems servicing the debt, and therefore most importantly do not end up becoming defaulting customers.
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[...] largest credit card issuer has decided to ease up on the growth of its credit card business following in the same footsteps of Standard Chartered Bank as was reported here a couple of weeks ag…. In fact seeking better quality clients that are more likely to repay their obligations has been a [...]