Implementation of Basel II will help banks in reducing risk in retail loans. Standardized approach to risk in retail lending offers the risk weight of 25% points less than what is prescribed under Basel I. Advanced approach also offers the same benefit but depends upon the composition of portfolio. This will make the retail loans more attractive. The main challenge for banks is to ensure sufficient capital for heightened risk exposure. The treatment of qualifying revolving credit exposure under credit cards is a contentious one and will bring major changes for banks especially those who will use IRB approach.
The growth of retail lending especially in the emerging economies is attributable to the evolving macroeconomic environment owing to financial market reform, the rapid advances in information technology and several micro level demand and supply factors. These factors relate to fiscal incentives from the governments, low credit off-take from the commercial and corporate sector, lowering of cost of housing, consumer durables and automobiles due to competition and technological innovations leading to increasing use of credit/debit cards, ATMs, etc. The growth of retail lending is reflected in "the consumer loan as a percentage of GDP" which stands at 55% in Korea, 52% in Taiwan, 33% in Malaysia and 18% in Thailand. Another indicator, i.e., "consumer borrowing to household income" stands between 50% to 100% in Korea, Thailand and Malaysia whereas for Singapore and Hong Kong, it exceeds 100%. Although the above indicators are in the single digit for India, the retail lending has been the mainstay, constituting 21.5% of the total outstanding advances as on March, 2004. However, the scenario remains the same in the developed markets as well. For example, in the United States of America, 54% of the outstanding debt (that stood at $16.2 tn) was consumer outstanding debt comprising revolving and non-revolving debt and home mortgage loans at the end of 2003.
Various cross section studies, however, suggest that the surge in retail lending may pose various risks with implications for banks' asset quality. The recent problematic experience of some areas of retail lending, such as credit cards in Korea and Hong Kong, might suggest that additional capital is needed to cover the risks of this market. Expressing concern about the high growth in the consumer credit segment, Reserve Bank of India has put in place risk containment measures and increased the risk weight from 100% to 125% in case of consumer credit including personal loans and credit cards. Home loans account for nearly 50% of the retail loans and the impairment risk emanates from the possible creation of a real estate bubble, fuelled sometimes by retail lending. Any subsequent crash in the real estate market (as was the case in several Southeast Asian countries in the late 1990s) could lead to erosion in property values to below the loan outstanding. |
