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FEATURE
Why are banks in love with
retail?
T here is a rush to start or become a bank these Moreover, their long-term business was impacted by regu-
days, which is surprising, considering the prob- latory pressures of capital to risk-weighted assets ratio
lems the sector is struggling with - huge bad (CRAR) and asset quality. So institutions such as IDFC, cre-
debts, low profitability and regulatory pres- ated to support infrastructure, converted themselves into
sures. But two factors seem to be driving it - commercial banks. We can appreciate the rush to retail
the access to low-cost funds and the prospects of high-vol- against this backdrop.
ume retail lending.
Banking is a low value-added business, commanding only
The new-found love for retail lending is not so bad in itself, small premiums (borne out by the modest return on as-
but concerns emerge about the role banks are expected sets), and profitability requires high volumes; retail credit
to play in our economy. is the low hanging fruit that can generate volumes.
Changing landscape While private and foreign banks always had a retail focus,
even the big PSBs, such as SBI (36 percent of total assets)
Until the 90s, the commercial banking system was domi- or even specialised institutions such as ICICI Bank (43 per-
nated by the public sector (over 75 percent of assets and cent) and HDFC Bank (33 percent), turned to retail in a
liabilities) with the primary role of financing government large way.
public deficits through the pre-emptive SLR (statutory li-
quidity ratio), which was once as high as 40 percent. On the supply side also, banks are shying away from
wholesale lending - weak investment demand is only half
Another important feature was the clear demarcation in the story; the larger issue is the risk of non-performing
long-term and short-term finance, with specialised Devel- assets.
opment Finance Institutions (DFIs) taking care of the
former, and banks, the latter. According to RBI data, five sectors, namely, mining, iron
and steel, textiles, infrastructure and aviation together
But since the early 90s, financial reforms led to the entry constituted about 25 percent of the total advances of
of newer private and foreign banks. They also had their scheduled commercial banks and, significantly, over 50
negative spin-offs. percent of the total stressed advances.
For banks, while pruning of SLR meant more resources to Infrastructure and iron and steel accounted for about 40
lend, newer regulations, such as Basel norms, necessi- percent. Such large exposures were due to the demise of
tated larger capital, greater focus on asset quality and the DFIs and the absence of developed debt markets,
more transparency. which placed the onus of financing on PSBs.
The DFIs also were adversely affected as they suddenly This brings us to the important question of the role that
found themselves without the low-cost, long-term re-
sources that the SLR regime provided.
48 | 2016 | JANUARY | BANKING FINANCE
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