In profit chase, banks have been running after unsecured loans the last three years

Even as the credit freeze by non-banking finance companies (NBFCs) post the IL&FS crisis has been in focus, crying for attention is banks chasing risky unsecured loans over the past three years.

While the overall bank credit growth has stagnated at 8-9 per cent between FY15 and FY18, their retail loans have grown in double digits. This was led mainly by risky unsecured segments such as credit cards and personal loans, which have grown at 30-31 per cent CAGR (compounded annual growth rate) over the last three years.

The share of credit cards and personal loans has gone up by eight percentage points in the last three years to nearly a third of all retail loans as of September 2018.

The outstanding loan amount for credit cards and personal loan segment stood at around ₹6.2 lakh crore at September-end.

“Unsecured loans are high-yielding loans. Given that there is intense competition within secured loans such as home loans, banks have been increasing exposure to these loans to improve their profitability and ROEs,” says Karthik Srinivasan, Group Head - Financial Sector Ratings, ICRA.

Between FY15 and FY18, retail loans have grown 16-19 per cent on an average every year, amid slowdown in corporate lending. The surge in retail loans has led to its share in the overall bank credit (non-food credit) going up from 19 per cent in FY15 to 25 per cent in FY18 and in the first six months of FY19. The share of corporate loans, in contrast, has come down from 44 per cent to about 34 per cent during this period. Within retail, home loans constitute about of half the portfolio and vehicle loans have a 9-10 per cent share. While there has only been a modest change in the share of these loans within retail, that of credit cards and other personal loans have seen a sharp uptick.

Needs a watch

In the past, too, banks have seen a boom in unsecured retail loans. In the two fiscals before 2008, for instance, retail loans grew 30-40 per cent, with personal loans and credit cards growing 30 per cent to over 40 per cent.

But high asset prices and the rising interest rates had prompted banks to consciously reduce their retail disbursements, especially the unsecured loans.

Credit cards, in particular, saw a sharp fall in the 2010 and 2011 fiscals. But the credit card business that peaked at about ₹30,000 crore in 2008 and almost halved by 2011, has been growing steadily, at 31 per cent CAGR, the last three years, and is now close to a ₹79,000-crore business. Other personal loans, too, have been growing at a robust 29 per cent CAGR over the past three years. “Unsecured loans, by design, are risky and hence a sharp growth within the segment needs a watch,” says Abheek Barua, Chief Economist, HDFC Bank.

But banks may be able to assess the risks better than, say, 10 years ago. “Use of CIBIL data, adopting data analytics and risk prediction models have mitigated the risk to some extent. Nevertheless, red flags need to be raised if there is unbridled growth in unsecured loans,” said Abheek.

“For banks that are able to manage their operating costs and asset quality, unsecured loans can yield better returns and profitability. Also given that there are various tools that help assess risks within the segment, banks are in a better position positon to do credit assessment. But how far banks are employing such tools and following sound credit practices needs to be seen,” says Karthik Srinivasan of ICRA.

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