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August A 4, 201 11 Mumbai

Tie er 2 cities more attr ractive fo or retail lo oan produ ucts


CRISIL C Re esearch, Ind dias larges st independ dent and in ntegrated re esearch hou use, expect ts increasin ng finance f pene etration and d the entry of o more play yers to drive faster growth in retai il loans dem mand in tier 2 cities. c Desp pite lower volumes, v th hese market ts are as pr rofitable as the larger markets on n account of o higher h yield ds, says its recent repo ort titled R Retail loan products: p O Opportunitie es and risks s beyond th he metros m and mini-metro os. Howev ver, given the differences in gro owth prosp pects and asset a quality y, selecting s the e right mark kets will be critical for profitable growth. g The T report details the current market m oppo ortunity, lik kely growth h prospects, , emerging competitiv ve scenario s and d key opera ating param meters such as finance penetration p , average ti icket size, loan l to valu ue ratio, r and no on-perform ming assets in i respect of o five retai il loan prod ducts housing loans, loan agains st property p (LA AP), car loa ans, two wh heeler loans s, and gold loans acr ross 15 tier 2 markets. The market ts covered c are Bhopal, Coimbatore, Indore, Jai ipur, Kanpu ur, Kozhiko ode, Luckno ow, Ludhian na, Madura ai, Mysore, M Na agpur, Nash hik, Rajkot t, Thiruvan nanthapuram m, and Vis shakhapatna am. These markets ar re significant s in terms of size, s and tog gether account for abou ut 15 per ce ent of the de emand for retail loans in i India. I CRISIL C Res search belie eves that gr rowth prosp pects in man ny of these markets ar re extremely y strong. Fo or example, e ca ar loan disbu ursements in i 10 of the e 15 market ts assessed are expecte ed to grow a at around 20 2 per p cent com mpounded annual a grow wth rate (CA AGR) over r the next 2 years as compared to o 13 per cen nt CAGR C in th he larger cit ties. In 7 of f these tier 2 cities, LA AP disburse ements wou uld grow fa aster than th he rest r of India a. Gold loan ns are expec cted to grow w at a much h faster pace (more tha an 50 per ce ent annually y) in five non-southern cities assessed. Strong ger growth prospects, lesser com mpetition, higher h yield ds and a profita ability comp parable to the larger r cities ma ake tier 2 markets an a extremely attractiv ve proposition p for finan nciers, exp plained Pr rasad Kop parkar, He ead Ind dustry & Customise ed Research, R C CRISIL Re esearch. CRISIL C Res search has used u cumula ative marke et share of th he largest tw wo players in i each mar rket to asses ss the level of competition n prevalent. The larges st two playe ers are estim mated to acc count for 50 0 per cent of o LAP L disbur rsements in n 2010-11, on an aver rage, across s the 15 markets m analysed. In fo four of thes se markets, m the ey accounted d for over 60 6 per cent of o disbursem ments. The correspond ding percent tage in large er cities c is muc ch lower, at t 35-40 per cent. c In case e of other lo oan product ts as well, th he trend is similar. s The T yield to o financiers is slightly higher h in tie er 2 cities, especially e in n the case of housing lo oans and tw wo wheeler w loan ns. Therefo ore, despite lower volu umes, these cities would be as pro ofitable as larger cities, provided p cre edit quality y is tightly monitored m Contrary t popular perception, not all tie to er 2 market ts fare f poorly in respect of o asset quality. In 8 out o of the 15 1 cities stu udied, the le evel of NPA As compare es favourably f with the all l-India aver rage for all l the five re etail loan pr roducts, added a Ajay y Srinivasan n, Head H Ind dustry Research, CRIS SIL Resear rch.

August A 4, 2011

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Analytical Contacts Prasad Koparkar Head Industry & Customised Research, CRISIL Research Tel: +91-22- 3342 3137 E-mail: pkoparkar@crisil.com Ajay Srinivasan Head Industry Research, CRISIL Research Tel: +91-22- 3342 3530 E-mail: ajsrinivasan@crisil.com

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August 4, 2011

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