Indian lenders have once again become cautious about unsecured retail loans amid a deadly resurgence of the pandemic and localized blockages that have made collections a challenge.
Unsecured loans, although more risky, earn higher interest rates for banks. However, as this portfolio is usually the first to suffer any external stress, creditors 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% in the previous year. While the private lender recorded a lukewarm 1.8% growth in credit, the unsecured loan segments, such as personal loans, commercial loans and durable consumer loans (on an aggregate basis), contracted 28%. The bank’s credit card assets also decreased by 16% during FY21.
The bank is much lighter and this allows it to take risks at the right time, said Uday Kotak, CEO of Kotak Mahindra Bank.
“We will certainly step on the accelerator and sign up for credit and keep in mind that there is a big collection challenge for the entire financial sector. So being light at the moment is not a bad place to be, “he said.
The challenge of collection referred to by Kotak, also the bank’s promoter, is what bankers believe will manifest itself in May, when executives fail to reach borrowers due to the pandemic.
The loss of revenue is also expected to hamper borrowers’ ability to repay, as the second wave of covid-19 engulfs India at an astonishing rate.
Meanwhile, Axis Bank also expects collections to decrease in the coming weeks, as infections continue to rise, impacting the movement of executives at the site, said its chief executive, Amitabh Chaudhry, on April 27.
Private banks have a larger share of unsecured loans in their books, compared to their state-owned peers. Unsecured loans make up 15.6% of the aggregate loan portfolio of private banks, while they are limited to 6.3% in their state peers, data from Indian Ratings and Research showed.
In fact, if India’s largest creditor, the State Bank of India (SBI) is excluded, the share of unsecured loans to 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 commercial loans and consumer loans, is worsening, given borrowers’ depleted financial reserves and nature of these loans.
Certainly, the only segment that banks are comfortable lending to now and are extremely optimistic about is home loans. Secured by a guarantee, these mortgages are one of the safest retail assets and lenders are tripping over each other to provide cheap home loans. However, caution regarding unsecured loans remains among banks.
Also at IndusInd Bank there is caution regarding unsecured loans. “We have always said that our unsecured portfolio is less than 5% of our general credit portfolio and that is the stated intention. We feel that the unsecured portfolio takes time to build and you need to have internal customers before you can start growing that portfolio, “said CEO Sumant Kathpalia.