Unsecured loans defy RBI caution

livemint.com:

MUMBAI : Indians snapped up collateral-free loans at a brisk pace in the June quarter, at a time the banking regulator has turned uneasy over the unabated growth in consumption credit. Unsecured loan portfolios of banks grew in double digits in the first quarter, led by a surge in personal loans. The growth in personal loans at HDFC Bank was 19.5%, ICICI Bank 38.6%, Yes Bank 32%, and Axis Bank 21%.

According to bankers, banks and non-bank lenders are competing for personal loans, which are collateral-free credit without a specific end use, allowing it to be used for consumption. “It has been quite competitive, and rates have not moved up. So, I do not see immediate, sort of, move-up in rates," Anindya Banerjee, the group chief financial officer of ICICI Bank, told analysts on 22 July.

Banerjee said credit experience in the unsecured personal loan segment has been pretty good over the years, and some reduction in interest rates from what it has historically been would be justified. However, rates are probably at a pretty low level, and Banerjee said he does not see them increasing much from here, although ideally, they should. Banks charge more for unsecured loans to compensate for the higher risk.

For instance, ICICI Bank charges an interest of 10.5-16% per annum on personal loans, whereas, on a secured product like a home loan, the interest rate starts at 9% (up to 31 July). While bankers say growth in these loans does not necessarily mean lax underwriting standards, experts and even the Reserve Bank of India (RBI) have cautioned against exuberance in this segment. Retail loans have been growing faster than overall loans in the banking system.