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Consumer, SME Loan Market To Grow $3,020 Billion In Next Ten Years: Credit Suisse

SME loans are expected to register a loan CAGR of 17 per cent resulting in SME loans-to-GDP increasing to 10 per cent by FY26 from 7 per cent now

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Credit Suisse (CS) estimated the consumer and SME loan market will grow from $600 billion to $3,020 billion in the next ten years.

As India goes from being data poor to data rich in the next 2-3 years, data becomes the new currency and financial institutions will be willing to forego transaction fees to get rich digital information on their customers.

CS report tries to crystal gaze on how the Indian financial landscape is likely to transform. The report identifies holy trinity of J.A.M. (Jan Dhan, Aadhar and Mobile) and advent of Unified Payment Interface (UPI) which has created backbone for instantaneous, inter-operable, cashless financial transactions.

It also means customer ownership will rest with best interface providers and incumbency of deposits will be challenged. Business models will be redefined and several revenue streams could be at risk.

Changing ecosystem – J.A.M. initiatives: These three systems, which are getting integrated with each other, are expected to allow a range of innovative services to be implemented in a paperless, instantaneous and cost-effective manner.

* Jan Dhan (Financial inclusion): In 2015, the number of unbanked population almost halved from 2014 level to 233m.

* Aadhar (National Identity card): This now covers over 1bn people, provides online identification and KYC.

* Mobile: Mobile phones penetration ~80 per cent, ~100mn smart phones sold per year (+40 per cent year-on-year), and rising broad-band connectivity (100% targeted by 2018).

J.A.M and UPI will impact critical aspects of the banking business: While India may follow other developed markets in terms of impact from digital payments, there are many outcomes which could be unique to India. a) Cost of transactions could head to zero b) The best customer interfaces (read apps) could own the customer c) Incumbency of deposit accounts can be challenged.

Digitization will accelerate the process of disintermediation and new business models will emerge: The process of disintermediation of retail deposits as seen over the past few decades is going to accelerate significantly with digitization. Further several revenue streams especially those one which needs least customer engagement, could be at risk of disruption due to digital revolution. Hence franchise of savings accounts could be challenged or margins on remittances / mutual fund sales commission could witness steep decline in coming years for the banking sector.

Retail loans to increase 5 folds over the next ten years: Banks have primarily focused on mortgage linked loans to drive retail loan growth with the share of unsecured loans quite low. The retail lending mix is set to change significantly as data availability will allow banks to offer transactional products rather than asset backed products.

Based on a bottom-up analysis of the key retail segments (housing, auto, personal, small business loans, etc.), CS estimated that total retail loans are set to increase 5 folds over the next ten years. It estimated consumer loans-to-GDP to increase to 25 per cent of GDP by FY26 (from 17 per cent as of now) driven by the increase in mortgage penetration (~13 per cent by FY26) and contribution from personal and other unsecured loans. SME loans are expected to register a loan CAGR of 17 per cent resulting in SME loans-to-GDP increasing to 10 per cent by FY26 from 7 per cent now.

GST could be a game changer for SME lending: Under the proposed GST structure, tax payers will file returns through a common interface developed under the GST Network. Actual tax will be paid in the bank and only challan details will be uploaded on the GSTN. The common portal, in addition to reconciling returns and challans, will also become a repository of all commercial B2B transaction records in the country in a single digital format. It is estimated that 3-5bn invoices will go digital with GSTN annually. This could be a rich source of information on SMEs, who have so far been operating in informal sectors with little documented transaction data.

Difficult to pick winners however banks that own the customers will be the key beneficiaries: As most banks are in the early stages of their digital transformation, it is difficult to pick winners. Success in migrating and adapting customers to their platforms will be the key to value creation. Banks (and non-banks) that "own the customers" will be the key beneficiaries of digitization as access to information will help them to deliver products cost-effectively.

Benefits of digitization could improve consumer banks' profitability by 30-70 per cent through a combination of lower costs (cost to asset lower by 30-60bps) as well as better revenues from acceleration in customer acquisition, higher cross-sell ratios, and a rise in fee income (5-8 per cent higher growth in fees and loan book).

So, when launching UPI RBI Governor Raghuram Rajan said, “A banking revolution is upon us”, he actually meant it!!

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