Banks can make better money by extending their retail banking into smaller cities as these markets offer higher yields, according to a Crisil Research report.
"Stronger growth prospects, lesser competition, higher yields and profitability comparable to the larger cities make Tier-II markets an extremely attractive proposition for financiers," Crisil Research Head for Industry & Customised Research Prasad Koparkar said.
Koparkar said despite lower volumes, the small cities are as profitable as the larger markets on account of higher yields, as finance penetration and the entry of more players will drive retail loan demand growth faster in these cities.
However, the report, titled 'Retail loan products: Opportunities and risks beyond the metros and mini-metros,' released here today, warned that given the differences in growth prospects and asset quality, selecting the right markets will be critical for profitable growth.
"Contrary to popular perception, not all Tier-II markets fare poorly in respect of asset quality. In eight out of the 15 cities studied [in the report], the level of NPAs compares favourably with the national average for all the five retail loan products," said Crisil Research Head for Industry Research Ajay Srinivasan.
The report details the current market opportunity, growth prospects, emerging competitive scenario and key operating parameters like finance penetration, average ticket size, loan to value ratio and NPAs in respect of five retail products - housing loans, loan against property, car and two-wheeler loans and gold loans - across 15 Tier-II markets.