Driven by mortgages, ICICI Bank's retail loan portfolio today constitutes 68 per cent of the bank's total advances and for the nine months ended December 31, the retail loan book was of the order of Rs 54,100 crore (Rs 541 billion). Much of the credit for building up the business goes to V Vaidyanathan, executive director, ICICI Bank.

With interest rates having risen sharply, there's concern that retail lending could taper off and that there could be an increase in non-performing assets. Vaidyanathan spoke to Shobhana Subramanian on why he thinks customers can handle the higher interest rates.

Do you believe that the RBI is done with tightening liquidity? Or do you feel interest rates could go up further?

The RBI wants to contain inflation and is raising rates to cool demand. But if inflation continues to remain like this, we cannot technically rule out another round of rate hikes. However, if inflation tapers off in six months' time, you may see another story altogether.

So is ICICI Bank going to raise rates further? And have you started increasing the EMIs rather than simply extending the tenure?

Last month we've raised rates by 100 basis points and we'll be raising rates again, though we haven't yet articulated by how much, though not for existing customers. As for reworking loans, it is still in a stage where the tenures are being increased but for a few customers, who are beyond a certain cut-off age, we are increasing EMIs also.

How perturbed do you think customers are because of higher interest rates?

They are not indifferent to it, but I think customers today are happy because the value of their property has appreciated. Besides, incomes have risen so cash flows are increasing so they can afford to pay. Both these, I believe, are mitigants against the fact that interest rates have gone up.

From the bank's point of view are you seeing home loan NPLs going up?

Not at all, the home loan portfolio is stable and the reason is that people's cash flows have gone up. Credit behaviour in this country is very good and we continue to be under-leveraged at just 10 per cent of the GDP.

Housing loan NPAs are about 1 per cent and the losses that you charge to the P&L account are about 20 basis points. That too, you don't really lose because it's just that customers are behind schedule and there's always the property collateral.

Do you think banks have become more vulnerable in segments where the rates are floating, such as mortgages?

Floating rate products completely insulate banks from an interest rate risk because it's the customer who is taking the position, not the bank and I would not worry about credit performance.

I also believe banks' profits will not get eroded because they will try to maintain margins. Also, with interest rates going up, it's become easier to sell fixed deposits and also mutual funds, so we're making fee income. If the environment changes, we will adapt.

Are you seeing a slowdown in consumer demand for home loans? Is the appreciation in property prices deterring new buyers?

I'd say that affordability is certainly an issue. It's got more to do with prices rather than interest rates. I do see some hesitation on the part of consumers buying homes and the number of transactions being put through the property market is actually plateauing. That's not an ideal situation because more people should be buying homes; our estimate of the shortage in India today is around 35 million homes.

However, the average ticket size is going up because people are earning more and so can afford to buy a house. In the last couple of years, the average ticket size would have gone up by about 25 per cent compounded. Therefore, we'll get adequate volumes and the book sizes of banks continue to grow.

Is there a slowdown in borrowings for categories like car loans or two- wheelers?

I would not say there is no slowdown, but that story is more or less intact. That's because this segment is more resilient to interest rate rises since the tenure of the loans is so short. Paying a hundred basis points for one or two years through EMIs is not an issue; for twenty years it might be. These segments are actually more a macroeconomic play.

With the quality of life improving in the metros, there's an upgrade of lifestyle and so the demand is strong and not as sensitive to interest rates.

Are consumer goods manufacturers or retailers seeing a slowing demand?

No, but they deeply fear that the banking community's allocation of funds to the sector will come down. They're asking us to keep the fund flow going, even though they understand that rates have gone up. They're more concerned with the availability of money - possibly because last March many bankers went slow - than the rise in rates.

We can't deny that liquidity is under strain, though at ICICI consumer credit is still up 25 per cent (Y-o-Y) on a higher base despite rates trending upwards. My sense is that the consumer business as a whole will see a 20 per cent growth in the next financial year, which is fair given that interest rates have spiked so dramatically.

Do you see total credit growth tapering off because of the slower offtake of consumer credit?

Yes, I do. Whether it will happen significantly or not, it's hard to say. With the interest rates rising, a borrower is more inclined to keep his money in savings. When interest rates are 14 per cent and deposit rates hit 9.5 per cent, if one is liquid, one tends to save. If rates had been 200 basis points less, one doesn't mind leveraging oneself.

Deposits were growing at 17 per cent while credit was growing at 30 per cent. With interest rates going up, credit growth could come down to say 26-27 per cent while deposit growth could go up to 20-21 per cent. I can see that happening.

Do you think that GDP growth would at all be impacted because of the slowdown in consumer lending?

If consumer demand tapers off, to that extent, you are consuming less and producing less. But, I'd put a rider to it. I'd say the RBI is trying to balance this equation.