Unsecured Lending Rise in Gloomy Credit Scene

Unsecured retail lending products, including personal loans and credit cards, are seeing a healthy uptick in disbursals even as the the overall credit environment in the country remains sluggish. Analysts say that with corporate loan growth slowing in a constrained economic environment, banks are increasing focussing on other segments like unsecured loans to grow their loan books.

The Reserve Bank of India (RBI) data show that the disbursements of unsecured lending products grew by 20.35% to Rs 1.84 lakh crore between March 23, 2012, and January 25, 2013. The corresponding growth levels for other loan segments, which have a larger base, was considerably lower. For instance, the loan growth for industries grew by 8.3% to Rs 21.3 lakh crore, agriculture by 6.8% to Rs 5.58 lakh crore and home loans by 10.4% to Rs 4.45 lakh crore. Some other retail loan segments like consumer durables and services sector loans like shipping saw negative growth during the corresponding period.

At the end of the December 2012 quarter, private lender Axis Bank recorded a 86% year-on-year (y-o-y) growth in its unsecured portfolio to Rs 4,326.12 crore. Another private bank, HDFC Bank, saw a growth of 37% y-o-y to R26,820 crore in the same period.

However, public sector banks have seen moderate growth in the segment with State Bank of India recording just 8.3% y-o-y growth in the 'Other Retail' lending segment (which includes unsecured loans) to Rs 68,814 crore. Union Bank of India saw a 9.7% y-o-y growth in its unsecured portfolio to Rs 616 crore. Unsecured retail products are not backed by collaterals and are given on the basis of the credit history of the borrower. Bankers say that people generally avail unsecured loans to meet personal expenses like wedding or hospitalisation. The interest rate on these loans is often higher than secured or collateralised loans. The unsecured loan segment saw huge defaults in the aftermath of the 2008 financial crisis and banks including ICICI Bank and HSBC consequently reduced their focus on the business. However bankers insist that they have learned lessons from the past and have now put in more robust systems to prevent such eventualities. Apart from greater due diligence, banks have begun using credit bureaus more extensively by sharing data about delinquents with them.

Aditya Puri, MD&CEO of HDFC Bank, said that it does not matter if the loans are secured or unsecured as long as you choose your customer prudently. “The problem arises when banks start lending to sub-prime borrowers who do not have the capacity to repay the loans,” he said. Jairam Sridharan, head of consumer lending & payments at Axis Bank, said, “The unsecured book we will expand, but will keep focus on risk management. Its a very profitable business and addresses core needs – unstructured needs for money at unforeseen times,” he said.

However ICICI Bank till date remains selective in the segment. An ICICI Bank spokesperson said, “Unsecured retail products (personal loans and credit cards) account for only about 1% of the Bank's total advances. ICICI Bank is offering these products on a selective basis to limited customer segments, primarily focused on cross sell to existing customers of the Bank”. At the end of the December 2012 quarter the unsecured loan portfolio of the bank saw a 10% y-o-y dip to Rs 3,088 crore.

A Union Bank executive said the public sector banks generally do not push their unsecured retail products too aggressively owing to the risks associated with the segment. “We only offer personal loans to our existing trusted customers. Learning from the 2008 experience we have decided not to aggressively acquire new customers for unsecured lending products,” he said.