Better economic environment, demand boost confidence.
Hopes of accelerated growth in the domestic economy, coupled with expectations of wage increments and an improved demand for consumer goods, have encouraged foreign and private lenders to switch their attention back to the unsecured loan market.
“We have selectively started increasing the sourcing of unsecured loans. We believe it will remain an important part of our portfolio,” Neeraj Swaroop, Standard Chartered Bank’s regional chief executive for India and South Asia, told Business Standard.
Typically, unsecured loans comprise credit cards and personal loans and are perceived to carry greater risk. These loans, however, charge higher interest rates and offer higher margin than secured advances.
The global financial crisis, with its cascading effect on Indian economy, saw most private and foreign banks moderate growth in their unsecured advances locally as delinquencies increased in the same.
For instance, the Hong Kong and Shanghai Banking Corporation (HSBC) slowed its unsecured loan disbursements after high loan-impairment charges hit its pre-tax profit in India in 2009.
“Winding down of the unsecured loan book and recoveries in corporate loans helped us improve our asset quality,” Stuart Davis, chief executive officer of HSBC’s India operations, said in a conference earlier this month.
However, the bank had started growing its unsecured loan portfolio since the fourth quarter of calendar year 2010, he added.
Analysts reckon an improved economic environment has given banks the confidence to re-enter this segment.
HDFC Bank, the country’s second largest private lender, said as the demand for some unsecured products was picking up again, the growth in those products would also look up.
“We moderated our growth in unsecured loans. However, we did not exit or completely de-grow those portfolios. Having stayed in that business, we have figured out the segments that work well. Our focus on unsecured (loans) has been a lot towards our own internal customers, those who have a relationship with us,” Paresh Sukthankar, executive director of HDFC Bank, said.
Bankers said while they were keen to grow their unsecured loans, they would prefer doing it selectively, focusing more on their internal customers to minimise the risk of deterioration in asset quality.
“We will have to be careful. It is a segment, which is amenable to over-leveraging if not done carefully. however, if we do it carefully, it is a good business to be in,” Standard Chartered’s Swaroop said.
“Eventually it was bound to happen. Globally, personal loans form a large part of bank businesses. The current environment is much better than what it was two years back. Credit bureaus have become more useful. Thus, if done in the right manner, it can become a profitable business for banks,” said Vaibhav Agarwal, vice-president (research) at Angel Broking.