India is beginning to experience its own version of the subprime crisis as banks tighten lending procedures to curb rising delinquencies, particularly in small unsecured personal loans.
India's financial system has so far been spared much of the pain of the global subprime crisis because of the relatively small size of its banks and their conservative investment focus overseas.
But persistent inflationary pressure has forced the Reserve Bank of India, the central bank, to keep interest rates high, which in turn has hit retail credit, from home loans to car and personal unsecured loans.
Overall loan growth in India, which has been on a downward trend since peaking at nearly 40 per cent in early 2006, has slumped to about 20 per cent this year due to real lending rates that are among the highest in Asia at about 7 per cent, according to Credit Suisse.
The slowdown has been felt most acutely in what was formerly one of the sector's fastest growing segments - personal unsecured loans - which includes credit cards and micro "small ticket" loans. The small ticket loans form what analysts have loosely dubbed India's "subprime" segment, although unlike in the US, these borrowers are low-income earners - blue collar workers and self-employed traders - and not people with a poor credit history.
"The balance sheet is still performing well but delinquencies [of personal loans] have been higher than what one would have anticipated," said Sanjay Nayar, chief executive officer of Citigroup in India.
Citigroup does not disclose details of its non-performing loans in India but Mr Nayar said it was rejigging some of its operations to target India's emerging middle classes better.
However, while the growth in defaults in small ticket loans has only had a marginal impact on overall credit quality, it has scared Indian banks into becoming more conservative about their lending.
This has led to a tightening in consumer loans across the board and taken some of the sheen off the nation's economic outlook on the basis of reduced expectations for economic growth.
Some had hoped that India's gross domestic product growth would exceed 10 per cent, but a figure of 8-9 per cent is now looking more realistic.
ICICI, India's largest private bank, withdrew altogether from small ticket lending six months ago and now only provides credit to the "prime personal loan" segment, or facilities above about Rs100,000 ($2,500, euro 1,600, pound 1,200).
V Vaidyanathan, executive director of ICICI Bank, said this business was still performing strongly, although global credit tightening and ICICI's own analysis had led it to become more cautious about lending in general.
"We have tightened credit norms across all segments of the credit portfolio. Though the existing book is performing very well, it's better to be conservative," he said.
