Consumers turn to personal loans

MUMBAI: Mortgages may be every banker''s pick of the season, but another new retail business —- unsecured personal loans —- is quietly topping the growth charts.
Personal loans, a new business for private and foreign banks (public sector banks have been offering such unsecured loans for decades as lines of credit), have been growing at 30 to 35 per cent for most new entrants who launched personal loan products three or four years ago.Besides, higher profitability in unsecured personal loans (mortgage margins are under pressure) makes it an important segment for consumer banks.
HDFC Bank claims that it has seen 100 per cent growth in this segment, but then a relatively small base may account for this high growth figure. Consumers seem to be making a beeline for packaged loans at a cost of 15 to 20 per cent. And the bulk of them are young spenders with high aspirations and creditworthiness but with inadequate spending power. Besides, it often works out cheaper than using a credit card which attracts an interest rate of over 24 per cent.
‘‘Once margins came under pressure, the banking industry moved from corporate assets to secured businesses like home loans and auto financing. The next logical jump is to unsecured personal loans and credit cards. However, the risks associated with an unsecured product are always higher,’’ says Standard Chartered consumer banking head Vishu Ramchandran.
While the drivers for this business are an easy repayment schedule (in monthly instalments), a specific end-use, and cheaper rates when compared with credit cards, HDFC Bank’s retail head Neeraj Swaroop says that with margins under pressure and competitive interest rates for home loans, the unsecured loans business is a profitable one.
‘‘Our personal loans business is growing at 35 to 40 per cent. While growth figures don’t really indicate much as we have a small base, the segment is certainly one of the most profitable in our retail portfolio,� says ICICI Bank’s head of retail assets V Vaidyanathan.
According to HSBC’s senior personal banking manager SB Kulkarni, consumers are looking forward to loans that are not collateralised.
The unsecured personal loans segment is driven by events such as weddings, educational needs, and higher aspirations. It is reflected in conspicuous consumption wherein tenures are short (one to five years) and loan amounts are upwards of Rs one lakh.