Lenders Grow Cautions on High-risk Unsecured Loans

Lenders are going slow once again on micro finance loans, credit cards and personal loans, as they see these unsecured loans to have become riskier amid the second wave of the pandemic.

Performance of these loans is worsening given the low capital cushion and risky nature of such assets, said lenders, who have become extra cautious while providing new collateral-less loans.
“Unsecured consumer retail, credit cards, micro finance loans are at much higher risk,” Kotak Mahindra Bank managing director Uday Kotak said. “We will certainly step on the gas and do credit underwriting and keep in mind there is a huge collection challenge going to come for the entire financial sector.”
The private lender had reduced its unsecured book to 5.8 per cent of total credit at the end of March from 7.5 per cent a year earlier.
Peer IDBI Bank, which recently found its way out of the Reserve Bank of India’s prompt corrective action, is also shying away from such loans.

“We definitely don’t want to lap up risky assets; our target is to onboard customers who have a credit score of 700 and above,” said Rakesh Sharma, IDBI Bank’s managing director. “We have maintained a very small portion of unsecured book. Our focus is to grow the mortgage book.”
Personal loans in the banking industry grew at a slower pace of 10.2 per cent in the last fiscal year ended March 31, compared with more than 15 per cent the preceding year, RBI data showed. Consumer durable loans were the worst hit and contracted by more than 21 per cent between March 2020 and 2021. The segment had grown 47.6 per cent the prior year.
Credit card outstanding totalled Rs 1.16 lakh crore at the end of March, a 7.8 per cent increase in a year against more than 22.5 per cent growth in fiscal 2020.
“We have always said that our unsecured portfolio is less than 5 per cent of our overall loan book and that is the stated intent. We have felt that the unsecured portfolio takes time to build up and you need to have internal clients before you start scaling up this portfolio,” said Sumant Kathpalia, MD of IndusInd Bank.

Domestic ratings firm India Ratings has stated that in view of a twofold increase in retail stress, banks over the last one year had tightened filters, more so for new-to-bank customers, and hence slowed down disbursements. This, along with having no nationwide lockdown like in last year, could prevent a comparable stress in retail assets, it said.

The aversion towards unsecured loans has led banks to push more home loans and gold loans. Outstanding home loans grew 9.1 per cent to 14.5 lakh crore in fiscal 2021. Gold loans saw the biggest jump with total outstanding growing to Rs 60,464 crore, a rise of 81.6 per cent in a year.

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