RAROC….Lenders in India are saying whats that?
As a banker, you are taught the concept of Risk Adjusted Return on Capital. Fundamental logic of lending is you price for risk. Sovereign return is taken as the risk free return and you seek a premium on it to justify the additional risk you are taking on the loan. The further away the borrower is from AAA, the higher the risk premium and hence the rate of the loan. Recent @CRISIL report says Personal Loans have a delinquency of 0.52% while Home Loans of 1.56%. Credit Cards are at 1.7% vs Loan Against Property at 2.62%. Interestingly, the rates of lending are inverse. The higher the default rates, the lower the interest rate! Sure, secured loans have lower Loss Given Default but recovery is a long drawn inefficient process and till that you carry the cost of impairment. Mis-pricing risk is one of the Seven deadly sins of banking. It seems that Indian lenders are pricing interest rates to ticket sizes. Lower the loan value, higher the rate and vice versa. Additionally, the longer the tenure of the loan, the lower is the interest rates thus lenders are totally missing the tenure risk premium they should be charging. Indian lenders are skating on thin ice here. Time we stopped pricing to competition and start pricing to risk?
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