Banks slow down unsecured personal lending as restrictions increase

Unsecured loans, although riskier, earn banks higher interest. However, since this portfolio is usually the first to be affected by any outside stress, lenders want to take it slow.

For example, Kotak Mahindra Bank reduced the relative size of the unsecured portfolio to 5.8% of its loan portfolio in FY21, from 7.5% the previous year. While the private lender saw moderate growth of 1.8% in credit, unsecured lending segments such as personal loans, business loans and durable consumer loans (on an aggregate basis) contracted by 28%. The bank’s credit card assets also declined 16% in FY21.

The bank is much lighter and that allows it to take risks when the time comes, said Uday Kotak, managing director of Kotak Mahindra Bank.

“We’re definitely going to step into gas and do some credit underwriting and keep in mind that there is a huge collection challenge that is going to come for the entire financial industry. Therefore, being light right now is not at all a bad place to be, ”he said.

The collection challenge alluded to by Kotak, also the bank’s promoter, is what bankers think will kick in from May as executives fail to reach borrowers due to the pandemic.

The loss of income is also expected to reduce borrowers’ ability to repay as the second wave of covid-19 engulfs India at a breakneck pace.

Meanwhile, Axis Bank also expects collections to slow in the coming weeks as infections continue to rise, impacting the movement of executives in the field, CEO Amitabh Chaudhry said on Monday. April 27.

Private banks have a higher share of unsecured loans on their books than their state counterparts. Unsecured loans represent 15.6% of the overall loan portfolio of private banks, while it is capped at 6.3% among their state counterparts, according to data from Indian Ratings and Research.

In fact, excluding the State Bank of India (SBI), India’s largest lender, the share of unsecured loans for public sector banks is even lower, at 4.9%.

According to a March 16 report by India Ratings and Research, the performance of unsecured asset classes such as microfinance loans, unsecured business loans and consumer loans is deteriorating, given the depletion of funds. financial cushions of borrowers and the nature of these loans.

Admittedly, the only segment that banks are comfortable lending in now and which are extremely optimistic is home loans. Protected by collateral, these mortgages are one of the safest retail assets and lenders stumble upon each other for cheap home loans. However, distrust of unsecured loans remains among banks.

At IndusInd Bank too, there is a caveat about unsecured loans. “We have always said that our unsecured portfolio represents less than 5% of our overall loan portfolio and that is the stated intention. We felt that the unsecured portfolio takes time to build and that you need to have internal clients before you start expanding this portfolio, ”said CEO Sumant Kathpalia.