Public sector banks go slow on retail loans

Reckless lending during the three years of the retail credit boom beginning 2003-04 is hurting public sector banks hard.

Several have temporarily stopped granting retail loans at a large number of branches in cities following a substantial rise in defaults.

These banks have also withdrawn the powers of branches to sanction home loans, personal loans and loans to small businesses and traders, transferring them to regional units or head offices. Public sector banks account for over half of the total retail credit.

"We have curtailed powers at the branch level. In about 10-15 per cent of our branches where the overdue (default) percentage is high, retail loans (proposals) have to be referred to higher authorities like the regional office. For home loans, we have also started a couple of centralised processing units," confirmed a senior official of a south-based public sector bank.

"We have informally conveyed to branches where overdue loans are around 4 per cent (and above) to stop sanctioning retail advances. The number of such branches is high as follow-up for recoveries was also weak," the official said.

Branch officials have been told to concentrate only on recoveries and deposit mobilisation and stay away from sourcing loan customers.

Retail loans, which grew over 40 per cent each in 2004-05 and 2005-06, have been the prime driver of credit growth, increasing as a percentage of gross advances from 22 per cent in March 2004 to 25.5 per cent in March 2006. Within retail credit, housing loans grew 50.0 per cent in 2004-05 and 34.0 per cent in 2005-06.

Signs of a clampdown were evident over a month ago when O P Bhatt, chairman of the State Bank of India, India's largest bank, had warned that the incidence of non-performing loans is beginning to rise, particularly for small and medium enterprises.

He had also stressed that the capacity of Indian banks to identify and price risk was not adequate and in many cases absent. Several banks have seen non-performing assets in the home loan portfolio rising above 4 per cent and in personal loans to around 10 per cent.

For public sector banks, the situation has been compounded because loans to sub-prime borrowers "� ones with bad credit history or without a proven regular income stream "� are turning bad on a larger scale.

Private sector banks have been equally hit by defaults, especially in the sub-prime segment, but had some cushion in the high interest rates they charge on such loans.

Public sector banks generally do not differentiate between a prime borrower and a sub-prime one, so interest rates do not vary significantly between the two categories.