As retail falters, banks set eyes on unsecured loans
from Economic Times
MUMBAI:
The slowdown in growth of bank loans is spreading to the last bastion - retail - forcing lenders to raise their portfolio of unsecured loans after a gap of four years when rising defaults during the credit crisis burnt their fingers badly.Loans to most segments, including perennial guzzler non-banking finance companies and housing, are slowing, but the rate of growth of personal loans and credit card spends are rising at a fast clip.
Banks are targeting individuals because the corporate world has slammed doors on new projects and expansion, given government obstacles and policy paralysis. The personal loan growth rate has more than doubled at 23% in October, from 9% a year earlier, data from the Reserve Bank of India shows. Loans under credit cards have grown 17% in the same month, up from 5% a year ago. This contrasts with housing loans growth falling to 12%, from 17%. Consumer durables lending declined 17% from a year ago.
"Our focus with unsecured lending is predominantly on existing customers of the bank," said Jairam Sridharan, head, consumer lending & payments, Axis Bank "We believe this is a much safer strategy to follow for banks like us with a large customer base compared with the more 'open-market'-oriented strategies followed by some in the past.'' Top bankers like SBIChairman Pratip Chaudhuri and ICICI Chief Executive Chanda Kochhar have been lamenting that new projects have literally dried up.
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Recovery Easy in Retail Loans
Bank loans, which were growing at more than 30% before the credit crisis, have just about halved. Non-food credit has fallen to 16% in October. Furthermore, rising bad loans in the infrastructure sector such as power and roads have also forced banks to avoid corporate lending.
Retail, even though small in size, spreads the risk of default and loans in this segment are easier to recover. Nearly half the retail loans are for homes. With demand for homes also waning due to high prices, banks are now lending for discretionary consumption.
Unsecured lending is essentially done without any collateral, and hence is more risky. The interest rate on these loans is often higher than secured or collateralised loans.
In the bull market up to 2008, banks were aggressive in unsecured lending, only to learn that it is probably the riskiest part of the business. Many, including Citigroup, HSBC and ICICI Bank curtailed lending to retail.
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