Tier 2 cities more attractive for retail loan products

Mumbai: CRISIL Research, India’s largest independent and integrated research house, expects increasing finance penetration and the entry of more players to drive faster growth in retail loans demand in tier 2 cities. Despite lower volumes, these markets are as profitable as the larger markets on account of higher yields, says its recent report titled “Retail loan products: Opportunities and risks beyond the metros and mini-metros”. However, given the differences in growth prospects and asset quality, selecting thee right markets will be critical for profitable growth.
The report details the current market opportunity, likely growth prospects, emerging competitive scenario and key operating parameters such as finance penetration, average ticket size, loan to value ratio, and noon-performing assets in respect of five retail loan products – housing loans, loan against property (LAAP), car loans, two wheeler loans, and gold loans – across 15 tier 2 markets. The markets covered are Bhopal, Coimbatore, Indore, Jaipur, Kanpur, Kozhikode, Lucknow, Ludhiana, Madurai, Mysore, Nagpur, Nashik, Rajkot, Thiruvananthapuram, and Vishakhapatnam. These markets are significant in terms of size and together account for about 15 per ceent of the demand for retail loans in India.
CRISIL Research believes that growth prospects in many of these markets are extremely strong. For example, car loan disbursements in 10 of the 15 markets assessed are expected to grow at around 20 per cent compounded annual growth rate (CAGR) over the next 22 years as compared to 13 per cent CAGR in the larger cities. In 7 of these tier 2 cities, LAP disbursements would grow faster than the rest of India. Gold loans are expected to grow at a much faster pace (more than 50 per cent annually) in five non–southern cities assessed. “Stronger growth prospects, lesser competition, higher yields and profitability comparable to the larger cities make tier 2 markets an extremely attractive proposition for financiers,” explained Prasad Koparkar, Head – Industry & Customized Research, CCRISIL Research.
CRISIL Research has used cumulative market share of the largest two players in each market to assess the level of competition prevalent. The largest two players are estimated to account for 50 per cent of LLAP disbursements in 2010-11, on an average, across the 15 markets analyzed. In fo four of these markets, they accounted for over 60 per cent of disbursements. The corresponding percentage in larger cities is much lower, at 35-40 per cent. In case of other loan products as well, the trend is similar.
The yield too financiers are slightly higher in tier 2 cities, especially inn the case of housing loans and two wheeler loans. Therefore, despite lower volumes, these cities would be as profitable as larger cities, provided credit quality is tightly monitored “Contrary to popular perception, not all tier 2 markets fare poorly in respect of asset quality. In 8 out of the 15 cities studied, the level of NPAs compares favorably with the all-India average for all the five retail loan products,” added Ajay Srinivasan, Head – Industry Research, CRISIL Research.

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