This deal is symbolic of one of the major trends currently carrying the retail loans industry in India - the growth engine for home, home and car loan has moved from the metros to the smaller cities.

According to a recent research report, 11 of the top 100 fastest growing cities in the world are in India. These are not our metros, but the smaller cities - Bhilai, Bhopal, Dhanbad, Asansol and the like. Ask any car manufacturer in India where their real growth is coming from, and it is clearly from smaller towns, even from the semi-urban and rural markets.

Banks have responded in the past ten years by increasing focus on this segment. The global recession put brakes on the fast-paced growth of this industry, particularly in unsecured lending like personal loan and credit cards. That changed in 2011, with banks re-focusing on these businesses again. The other visible change is the strong emergence of a loan category that was previously confined only to very small towns and villages — gold loans. In the last five years, gold loans have overcome the social stigma that was sometimes attached to them, and have become a major focus area for many mainstream financial institutions.
It is not all good news in the loans industry though. With consistent increase in real estate prices over the years, some major housing markets have become increasingly unaffordable.

In the last quarter, the average price of a new house sold in Mumbai was more than `1 crore. One wonders how many people can afford such expensive housing. This is starting to impact demand in these high priced markets. Given banks’ historical dependence on these markets for loans business; it is likely that any slowdown in demand will impact lenders adversely.
The other major threat is the high interest rate environment. As customers’ EMIs have increased recently, and as customers with ‘teaser’ loans see their interest rates reset to much higher levels, banks are bracing for a hard impact on the credit risk on their housing loan portfolios. Also, the state of our infrastructure is another major challenge the loans industry faces.

Unless more (and better quality) roads get built, the car industry might not be able to sell effectively. Unless our cities have better power, water, parking and other infrastructure, developers might not find many takers for new projects. With that, loan demand would suffer too.

A few months after the Mercedes deal in Aurangabad, there was another bulk deal — this time for 180 luxury cars, in Kolhapur.