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Personal loans are out of step

George Smith Alexander

If you are a top-rated corporate, you can access loans at rates much below the prime lending rates of banks.

But an individual, however sound his financial position may be, cannot access personal loans cheap because the concept of rating individuals is still alien to Indian banks.

Fierce competition to garner more business volumes has driven down the rates of retail loans over the past year but still they are quite high and not in sync with the overall interest rate structure.

The cheapest of retail loans may be housing loans (mortgages) at around 11.5 to 12 per cent.

Loans against the RBI Relief bonds can also be obtained at around this level. Car loans are pegged at 12 per cent to 13 per cent, loans against shares at 13 per cent to 14 per cent, education loans at around 14 per cent and two-wheeler and consumer loans at 19 per cent to 24 per cent. Credit card loan rates are pegged at over 30 per cent.

ICICI Bank's executive director Chanda Kochhar says there has been a reduction in retail rates over the past few years and the steepest fall has been in mortgage loans. The rates have been driven down by the banks, relatively new entrants in this segment, because they have access to low-cost funds.

"Operating costs of retail loans are higher because of ticket size is lower than a corporate loan," Neeraj Swaroop, HDFC Bank head for marketing & retail assets, says.

However, in the mortgage business, the cost of funds determines the loan rate because the size of loans is not that small," Neeraj Swaroop, HDFC Bank head for marketing & retail assets, says.

In some segments of retail loans, customers can bargain and beat down the price. For instance, car loans can be priced at as low as 9 per cent, depending on the dealer and car models. The dealers often pass on the discount they get from the manufacturers to consumers, thereby bringing down the effective interest rates.

Standard Chartered Bank's regional head for consumer banking, Vishu Ramchandran, says that if the banks are cutting prices for increasing their market share in car loans, this will affect profitability. "Unless there is a major reduction in the costs of funds, any further reduction will be damaging for players, however big they are. There will have to be a trade-off between market share and profit," he points out.

HDFC Bank's managing director Aditya Puri too echoes the same sentiment when he says, "Car loans are already at unrealistic rates. People are not making money on these loans. Anything below these rates would be unsustainable."

IDBI Bank's country head (retail banking) Ajay Bhimbett feels that the rates on personal loans are high as they are small-ticket loans averaging at around Rs 50,000. The default rates on these loans are as high as 3 to 4 per cent. "In the absence of an individual credit bureau, the same customer can take loans from different banks even though he is a defaulter," Bhimbett points out.

On credit cards, new players like ICICI Bank, State Bank of India and HDFC Bank have brought down the rates of interest on a selective basis to 2.5 per cent per month while the other players still charge between 2.75 per cent and 3 per cent. The reason the banks advance for the high rate is the 4 to 6 per cent default rate, coupled with the high operating costs (monthly billing statements, cheque collection, follow-ups, etc).

The possibility of a drastic cut in rates here is remote as the dynamics of the card industry are very different from those of vanilla loans. Banks are required to set up infrastructure like customer service centres, call centres and invest huge capital in the credit card business. The low ticket size is also another stumbling block. The total outstanding of the credit card industry is only around Rs 6,000 crore (Rs 60 billion).

Overall, consumer loans are a different kettle of fish. Apart from the cost of funds, the banks also pay for acquisition of customers which can be as high as 4 per cent for some of them. This intermediation cost, coupled with defaults, makes the overall consumer loans segment costly. A drastic fall in loan rates is unlikely despite the rush by banks across all segments to dole out retail loans.

StanChart's Ramchandran has a work of caution: "Financiers must be principled in the way they exploit the opportunity. In any environment, an entry into the retail segment to compensate any loss of profitability in the corporate business is potentially unprofitable."

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