Retail lending builds special niche

Kathmandu, January 30:

The business of retail lending has boomed in recent years, thanks to the burgeoning conflict which has reduced opportunities for banks and commercial organisations to invest in big projects. Lower risk as compared to corporate lending is another major reason that has fueled retail lending.

All the 17 commercial banks and more than three dozen financial institutions of the

kingdom are working in consumer financing sector now. Retail lending now covers about 15 per cent of the total loan portfolio of these commercial institutions.

Low interest rate, wide range of service delivery channels, better network and improved brand imaging has been pivotal in garnering clients for these organisations.

Ajay B Shah, head of retail financial services, Laxmi Bank Ltd, said that political instability is one major reason which has hindered the investment in big projects and ultimately led to commercial banks opting for retail lending. “Though commercial banks can not sustain themselves only by offering retail lending services, but it is growing very fast with increasing professionalism,” he said.

“The other reason, which has bolstered retail lending, is fewer opportunities for investment for even ordinary people. Real state investment is considered very fruitful in Nepal and customers through retail lending get an opportunity to owe something now and pay the price in due course of time,” Shah said. “The potential to earn money is the capital of professionals and banks are offering them services considering it an asset,” he added.

Housing loan is leading the consumer finance sector with auto loans following it. Education loans, traveling loans, medical loans and many other such loans are being offered in retail lending. However, they are yet to gain momentum.

“The income brackets of middle class, upper-middle class and lower-middle class are increasing. And as people upgrade their living status, consumers of one domain shift to another and thus are domains being filled,” said Bhusan Rana, assistant general manager at Kumari Bank.

Retail lending would not crash for at least half a decade but it does not ensure sustainability of commercial banks either, as the market is very small, Rana said. We have invested about Rs 850 million in retail lending and our total loan portfolio is about Rs 6.5 billion. Depending upon the customer goodwill and earning capacity, banks finance upto 100 per cent, he said.

To be eligible for such consumer loans a steady income is a must and consumers should also abide by the basic policies of commercial banks in particular and other legal procedures. Depending upon the policies of an organisation, the loan tenure, interest rate, repayment schedule and collaterals can vary.

This was an untapped sector in Nepal till a couple of years back. The introduction of retail lending provided opportunities for banks and commercial organisations to invest.

As the loan portfolio is spread, the risk also spreads. This has attracted all commercial banks to join the sector.