Retail lending in India has been rising very rapidly. RBI has raised the risk weightage for housing loans and other retail loans to avert huge NPAs in this segment. In India, the ratio of retail lending to GDP is far below other Asian countries, which shows that the retail loans portfolio has not reached the peak. Bad debts in the retail portfolio are at 2.5% compared to the 7.4% of the industry level. This confirms that retail loans are safer, as of now. To avoid a bubble burst, banks should adopt best risk management strategies and conduct due diligence while sanctioning retail loans.

Nowadays, retail lending is the buzzword in banks in India. According to RBI's latest monetary policy, out of the total credit flow between April and August 2004, two-thirds had gone to retail loans. Most banks have retail loans of around 20% of their total lending portfolio and these loans are growing at an unnatural rate of 30% per annum. Housing loans constitute around 50% of the retail lending portfolio. Despite the fact that the housing loans portfolio grew only at 42% in 2003-04 compared to 55% the previous year, one analyst said, "Due to shortage of around 1.9 million housing units, demand for the housing loans may shoot up significantly in the near future."

Before going further let us first know why banks started concentrating on retail lending. Supportive measures from the government in terms of higher tax incentives for housing loans and RBI's minimum disbursement targets linked to incremental deposits besides lower risk weight for housing loans was what fueled the retail loans growth.

Another reason that boosted retail lending was the stock market rally in 2000, which due to the boom in tech stock prices poured billions of dollars into the Indian stock market. This pushed the interest rates southward.

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