VZCZCXRO8949
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #2652/01 2800704
ZNR UUUUU ZZH
R 060704Z OCT 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 3682
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 002652 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EINV ENRG EPET ETRD IN
 
SUBJECT: RETAIL BANKING SEES MODEST INCREASE IN RISK PROFILE 
 
Reftel A: Mumbai 436; Reftel B: Mumbai 409 
 
¶1.  (SBU) Summary: Retail banking has grown quickly over the past 
few years and has expanded into higher risk areas like credit cards 
and unsecured personal loans.  Retail banking assets nevertheless 
remain heavily concentrated in safer home loans, which have high 
collateral, often have a close tie to borrower income, and can rely 
on the borrower's extended family to cohabitate and hence contribute 
to payments.  The result is that, even with rapid growth in this 
relatively new area of lending, prudential norms and cautionary 
banking practices have contained bad loans to levels commensurate 
with expectations given the moderation in economic growth.  End 
summary. 
 
Retail Banking Overview 
----------------------- 
 
¶2.  (U) Retail banking comprises those banking services that 
interact directly with consumers rather than other banks or firms. 
Reserve Bank of India (RBI) data shows very high growth rates in the 
retail sector - 41% in FY2005-06 and 20.9% in 2006-07. The share of 
retail banking in total banking activity has risen from 9.4% in 1990 
to 22% in 2005 and 25% in 2007. 
 
¶3.  (U) RBI data show the following breakdown of the retail banking 
sector for FY2006-07: 
 
                      Share 
                      of Retail  Growth 
----------------------------------------- 
Housing loans         46.0       25.4 
Consumer Durables      1.5       63.3 
Credit Cards           3.8       47.3 
Auto Loans            16.9       34.5 
Other Personal Loans  31.8       31.1 
 
Home loans 
---------- 
 
¶4.  (SBU) Housing is the largest portion of the retail sector and 
benefits from substantial government support.  Pullar Rao, Banking 
Supervision Manager at the RBI in New Delhi, told Econoffs that 
loans up to Rs 2 million ($47,000) benefit from a lower risk 
weighting at 75 percent, whereas housing loans above Rs 2 million 
must be risk weighted at 150%.  [Note: The higher the risk weight of 
a bank's assets, the more the bank must hold in reserves.  End 
note.]  Moreover, home loans below Rs 2 million fall into the 
"priority sector" in which banks are required to direct at least 40 
percent of their loans.  (Other areas of the priority sector include 
agriculture and small-scale industry.) 
 
¶5.  (SBU) Rao opined that India's housing sector is less susceptible 
to the kinds of problems that have befallen the US housing market 
because housing loans in India are made on the basis of the house's 
listed value, not its market value.  While this may reduce the 
usefulness of a mortgage when housing prices are high, it does 
protect the banking system from large swings in housing prices. 
Secondly, bank assets cannot be individually sold off for 
securitization.  Thus for the most part, credit risk stays with the 
issuing bank.  Various private sector experts agreed that housing is 
the least vulnerable part of retail banking.  Most Indians live in 
the home they have a loan on, and the home is generally used by an 
extended family, meaning the family will fight very hard to stay in 
the home and do whatever it can to pay the monthly bill. 
 
¶6. (SBU) Tarun Bhatia, head of financial sector ratings for CRISIL - 
an Indian research and ratings firm owned by Standard & Poor's - 
expects mortgage asset quality to deteriorate modestly over the next 
three years, with delinquency levels rising to about 2.5-2.7 percent 
from 2.2 percent in March 2007.  Bhatia said a situation like the 
sub-prime crisis in the United States is unlikely to occur in India 
because banks lend only for mortgages on first homes and the lending 
is based primarily on the income of the borrower, not the value of 
the collateral. 
 
Credit cards 
------------ 
 
 
NEW DELHI 00002652  002 OF 002 
 
 
¶7.  (SBU) Credit cards are one of the fastest growing segments of 
retail banking and also one of the riskiest.  Banks have been 
aggressively selling credit cards and, with rising interest rates 
and the poor financial education of some borrowers, banking 
officials and regulators acknowledged to Econoffs that the segment 
is worrisome.  In fact, RBI officials in Delhi complained of the 
ineffectiveness of India's do-not-call telephone registry to 
illustrate the aggressive tactics of credit card salespeople. (See 
Reftel A.) 
 
¶8.  (U) CRISIL's analysis suggests that credit card receivables are 
the most risky asset in retail banking.  That said, credit cards 
still represent a small portion of total banking assets, making them 
unlikely to be a danger to the overall banking system.  Moreover, 
according to Bhatia, credit card yields at 32-40% largely compensate 
for the deterioratinn of credit card receivables as an asset class. 
Bhatia noted that competition for business between credit card 
issuers has been fierce because credit cards are used as a loss 
leader in the banking industry.  Banks hope that by offering 
attractive credit cards, holders will be more likely to make use of 
other, more lucrative credit products from the issuing bank. 
 
Personal Loans 
-------------- 
 
¶9.  (SBU) Personal loans are a catch-all category comprised of a mix 
of secured loans, with collateral backing the loan, and unsecured 
loans, such as for weddings - a major category of retail banking 
business here - and education. The RBI does not collect data on the 
proportion of personal loans which are unsecured.  Rajnish Datta, 
president of small business banking at Yes Bank, told Econoffs that 
the personal loan segment was doing poorly, an estimation shared by 
CRISIL's Bhatia for the industry as a whole.  Datta said that 
because of its poor performance, Yes Bank was moving away from 
personal loans. 
 
Assessing Credit Risk 
---------------------- 
 
¶10.  (SBU) One potential concern in retail banking is the lack of 
sophistication of the industry's sole consumer credit bureau - CIBIL 
- and conflict between the RBI and the Finance Ministry over rules 
to allow new foreign entrants into the market (Reftel B).  Aside 
from credit bureaus, banks most commonly use income tax receipts to 
verify income.  Most Indians do not report their income, however, 
and those that do often underreport their true income in order to 
lessen their tax burden.  Datta, of Yes Bank, told Econoffs that he 
thought income is underreported and that this poses a problem for 
Yes Bank in trying to issue loans.  He said that Yes Bank sends out 
agents to peoples' homes to verify information if the loan amount 
was over Rs. 500,000 (about $12,000). 
 
¶11.  (SBU) The result is that individuals that do not have proof of 
income are generally only able to obtain secured loans, if that. 
Though the government does not collect data in this area, RBI and 
bank officials alike thought most loans probably go to salaried 
individuals.  V.M. Sharma, of Punjab National Bank (PNB), explained 
that educational loans, because of their official priority sector 
designation, are often granted purely on the basis of a letter of 
admission and the quality of the school's website. 
 
Comment 
------- 
 
¶12.  (SBU) The rapid growth of banking assets in personal consumer 
loans is a cause for concern.  However, while non-performing loans 
(NPLs)(i.e., bad loans) are on the rise, this primarily represents 
disproportionate expansion of lending in risky categories like 
credit cards and unsecured personal loans, rather than an 
unexpectedly sharp increase in NPLs within individual loan 
categories.  Most importantly, the largest category, home loans, has 
not seen deterioration.  Further, higher rates charged in riskier 
categories presumably compensate banks for higher levels of risk. 
The rise in NPLs is not surprising given the cooling Indian economy 
and the prevailing view is that the rise in NPLs is proportionate to 
the slowing economy and tighter monetary policy. 
 
MULFORD