New challenges in retail banking

I was having a conversation on CIBIL and how it has changed the lending process at most institutions in India when someone asked me this – ” A large segment of the population has become CIBIL -ve due to various reasons incl the slowdown. Will these guys ever get credit in future once the economy revives?”

The question is interesting coz when the banks want to grow their loan books again, they would have to become less credit-risk averse or increase their reach.

a)Assuming that the distribution cannot ramp up fast enough (due to branch license issues etc)it would mean more aggression in looking at borderline cases (in terms of credit profile). Banks would have to find innovative ways to lower the credit cut off. Am told its already started happening — reduction in the CIBIL cut-off for cards sourcing and some are looking at a lower CIBIL score (if the track history on own products is fine).

But the risk attached to this approach is pretty obvious. You are looking down another cycle soon with probably a bigger exposure this time.

b)what will be more exciting is how banks other lending institutions innovate on their distribution channels. Now we all know that the fast ramp up in loan books happened thru the DSA channel- which amongst other things was costlier but easy scaleable. The cost element meant that this channel was suited for only cases with significant ticket size, so that the DSA covered his costs and made exciting enough profits.

As I look at it, the next wave of credit growth will come from channel innovation– Looking at identifying, building and scaling channels which will make sourcing profitable- even for smaller ticket sizes.

Once this happens, the whole dynamics of lending side profitability will change.
Coz account management (of already sourced customers) is mostly automated and hence costs do not vary with ticket size – infact the more accounts the cheaper it is to manage them due to cost amortizaton. Its sourcing which has significant variable costs and needs to be efficient to handle not only small tickets but find CIBIL OK profiles upfront.

Agree? or you think it would be back to DSA days with larger marketing spends across channels?