Mumbai, Jan. 8: Crisil, the credit rating agency, today said banks should brace for payment defaults on their retail loans because of their exposure to high-risk customers and rising interest rates.

Gross non-performing assets (NPAs) on these advances are forecast to rise to over 4 per cent over the next two years from 2.7 per cent as of March 2007. However, Crisil said the situation will remain manageable as secured loans that include mortgage and vehicle loans account for 80 per cent of lenders’ retail loan portfolio.

It added that the increasing exposure to higher risk customers was mainly through personal loans and credit card receivables.

These are unsecured and accounted for 17 per cent of the total outstanding retail loans in March 2007, up from 6 per cent in 2004.

Crisil managing director and chief executive officer Roopa Kudva said, “As competition has increased, players in retail lending, in their quest for growth and improvement in profitability, are reaching out to hitherto untapped clients, such as the self-employed and borrowers from smaller cities. This has increased lenders’ exposure to risk.”

Crisil felt that a reasonable definition of “sub-prime” in the Indian context could include small-ticket personal loans that are given to low-income customers, and a portion of credit card receivables.

Kudva said by this definition, sub-prime assets were still relatively low at 7 per cent of the total outstanding retail loans.

“We estimate the loss levels in this segment to be at 7 to 9 per cent, and expect them to increase to 10 to 13 per cent over the medium term. However, delinquencies across retail asset categories have gone up and are likely to increase in 2008-09,” she observed.

Housing loans constitute over half of the total retail loans. Gross NPAs in home loans increased to 2.2 per cent in March 2007 from 1.8 per cent in 2005 and these are expected to increase to 2.7 per cent in 2008-09.

Car and commercial vehicle asset segments comprise one-third of the retail loans. Crisil estimated that gross NPAs in these segments had increased to 2.3 per cent and 4 per cent as of March 2007.