Unsecured Loans gain importance with Banks
Growth of economy, expected wage increments, demand for consumer goods has prompted private and foreign banks to pay more attention to unsecured loan segment but they would prefer doing it selectively, focusing more on their internal customers to minimize the risk of deterioration in asset quality.
Neeraj Swaroop, Standard Chartered Bank’s regional chief executive for India and South Asia said that they have selectively started increasing the sourcing of unsecured loans as they believe it will remain an important part of their portfolio. “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,” he added.
Unsecured loans comprise of
which are usually carry greater risk.
Unsecured Loans are characterized by
- higher interest rates and
- offer higher margin than secured advances.
During and post global financial crisis private and foreign lenders controlled unsecured loan offers due to increased delinquencies.
For example, 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. Stuart Davis, chief executive officer of HSBC’s India operations said, “Winding down of the unsecured loan book and recoveries in corporate loans helped us improve our asset quality”. But HSBC had already started growing its unsecured loan portfolio since the fourth quarter of calendar year 2010.
According to analysts an improved economic environment has bolstered the confidence of banks to take active interest in the unsecured segment. HDFC Bank, says that the demand for some unsecured products showed signs of picking up so the growth in those products was also bright. Paresh Sukthankar, executive director of HDFC Bank, said, “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”.
It is a fact that globally personal loans form a large part of bank businesses. The current scenario being supportive than two years back plus the added help from credit bureaus have become more useful. Growing demand for personal loans can become a profitable business for banks if done in the right manner.
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