Bankers staying away from unsecured loans

The rise in defaults and recovery woes of loans has shied away banks from the unsecured lending market. Due to this the rate of growth in the personal loan portfolio of banks has come down to 13.2 per cent to Rs 58,669 crore as on February 15, 2008 as compared with 30.6 per cent in the same period last year,

Banks are shying away from the unsecured lending market, thanks to the rising instances of defaults and recovery woes. The Reserve Bank of India in its 2007-08 report on Macroeconomic and Monetary Developments said the growth rate of the personal loan portfolio of banks has dipped to 13.2 per cent to Rs 58,669 crore as on February 15, 2008, as compared with 30.6 per cent in the same period last year.

Major players such as ICICI Bank, Citifinancial and GE Money have stopped from mounting their uncollaterized lending portfolio because of deteriorating risk return ratio. Judicial intervention and regulatory raps following recent instances of crossing limits by recovery agents, private and foreign banks and non-banking finance companies the banks have exited the small ticket size personal loan segments (STPL).

ICICI Bank, the country's second-largest bank, has stopped lending to borrowers from the sub-prime segment, while the biggest player in small loans, Citigroup, has made its processes more stringent. "We have tightened our credit screening in the unsecured loan segment based on the performance of the portfolio. Given the environment in the collection and risk reward ratio, we have decided to go slow," said Chanda Kochhar, joint managing director, ICICI Bank. In spite of the slowdown in the personal loan growth, there has been rise in credit cards outstanding which has grown by 62.42 per cent to Rs 6,502 crore as on February 15, 2008, as against Rs 4,003 crore on February 16, 2007. Banks are now convincing consumers to buy products through a credit card as it is more cost-effective and a quicker means of payment.

ICICI Bank, has done changes in payment mode of its consumer goods financing, it has moved from the post-dated cheque system to the credit card payment mode. This has increased the ticket size spending on credit cards. "Overall, consumers are seeing credit cards as a convenient mode of payment. The spending on cards will continue to see an increase," said the credit card head of a private sector bank.

Even there has been slowdown in the growth in home loan portfolio of banks. The portfolio grew at 12 per cent to Rs 26,930 crore as on February 15, 2008, as compared with 25.8 per cent growth (Rs 46,019 crore) in the same period last year. "Rising interest rates have also affected the loan growth in the banking system. The home loan business has also taken a hit on account of the high property prices," said a senior banker.

If we see the real estate sector also has shown down fall to 26.7 per cent in the credit growth as on February 15, 2008, as compared to a growth of 79 per cent in the same period last year. However banks have clearly rebalanced their loan portfolio, which is apparent from the rise in credit disbursements to the corporate sector. Disaggregated sect oral data up to February 15, 2008, showed that about 45 per cent of the incremental non-food credit year-on-year was absorbed by the industry compared with 36 per cent in the corresponding period of the previous year.

The expansion of incremental non-food credit to industry during this period was guided by infrastructure (power, port and telecommunication), textile, food processing, iron and steel, engineering, chemicals, vehicles, construction and petroleum industries. The infrastructure sector alone amounted to around 33 per cent of the incremental credit to the industry in comparison to21 per cent in the corresponding period of the previous year. The agricultural sector occupied around 9 per cent of the incremental non-food bank credit expansion as compared with 12 per cent in the corresponding period of the previous year.