Indian appetite for loans unfazed by costs

The 33-year-old is paying back two other bank loans, but says he and his wife, who works as a company executive, have exhausted neither their credit limit nor an appetite for risk.

“With our cash flow, we can easily afford another loan,” said Virani. “This is the right time to buy an apartment because property prices are down and builders are willing to offer discounts. Interest rates are bound to decline.”

Young, double-income consumers like the Viranis, whose only dependent is an 18-month-old son, are fuelling a loan market that has grown at an annual rate of almost 30 percent in the past five years, undeterred by rising borrowing costs.

The Reserve Bank of India has twice raised short-term lending rates in 2007, by a quarter of a percentage point each time to 7.75 percent — the highest level in more than four years — to cool loan growth and tame inflation.

Yet consumer credit appetite remains undiminished in an economy that grew at a record pace of 9.4 percent in the fiscal year that ended March, bankers say.

“The urge to create an asset is very strong in the present generation of Indians,” said V.S. Reddy, general manager at Bangalore-based Canara Bank, India’s fourth-largest lender.

“Whether it be an apartment, a car or an appliance, people don’t want to wait to acquire it.”

Banks are raising capital to feed a consumer loan appetite that is in turn boosting corporate credit demand as companies expand production. Manufacturing is growing 12 percent, the services sector at 13 percent.

ICICI Bank, the country’s largest private bank, is this week raising US$4.3 billion in the largest share sale by an Indian company and smaller rival HDFC Bank plans to raise US$1 billion.

The sale comes days of real-estate firm DLF sold US$2.4 billion of shares to build more apartments.

The Indian portion of ICICI Bank’s share offering was more than fully sold on June 19, the opening day of the four-day offer, as investors bet on the consumer loan binge continuing.

“We are riding on the India growth story,” said Rajiv Sabharwal, senior general manager at Mumbai-based ICICI Bank, at the vanguard of consumer lending in a nation of 1.1 billion people. “We believe the high growth rates will continue.”

The bank’s consumer portfolio, including mortgages, car and motorcycle finance and credit-card loans, grew 39 percent last year to 1.29 trillion rupees, Sabharwal said. Consumer credit now makes up 65 percent of all loans.

Households earning between 90,000 rupees and one million rupees (US$2,250 to US$25,000) a year are expected to increase to 103 million in 2010 from 52 million now, ICICI believes.

It also sees 291 million people currently classed as deprived soon being able to qualify for loans.

Encouraged by rising incomes and economic growth, Indians are shedding their traditional propensity to skimp and save and a well-known aversion to credit.

Household incomes will rise at an average yearly pace of 6.4 percent in 2005-15, according to a forecast by consulting company McKinsey.

Consumption, which today accounts for 60 percent of India’s gross domestic product, is set to quadruple to US$1.5 trillion by 2025, overtaking Germany as the fifth-largest consumer market, the firm said in a recent report.

Retail lending helped boost demand for products and services, enabling companies to rise above “the borderline of recession,” said Canara Bank’s Reddy.

But banks have been quick to respond to the central bank’s cues and raise loan costs in the past two years — and monthly installments on a bank mortgage of 100,000 rupees have risen to as much as 1,250 rupees, from 900 rupees.

At ICICI Bank, mortgage loan growth has dipped to about 26 percent from 30 percent after interest rates rose, but demand remains robust in a nation that faces an acute shortage of housing, said the bank’s Sabharwal.

At less than one percent of total loans, sticky credits are still not a concern at the bank.

In the entire banking system, about two percent of household loans are in default, said a banker at a state-owned institution that has slowed its consumer-credit drive amid concerns about borrowers’ ability to repay.

Telemarketers from ICICI and other private banks still make incessant calls to individuals plugging loans, betting that consumer confidence and risk-taking will stay strong as the economy expands.

Indian consumers ranked first — for the third time in a row — in a global consumer confidence survey last year by the market-research firm A.C. Nielsen.

They include people like the Mumbai-bred and Bangalore-based entrepreneur Virani, who doesn’t worry about getting into debt to buy that dream apartment.

“If you are bullish about India and have a three-to-five year horizon, now is the time to buy,” he said.

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