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Banks shying away from unsecured lending market

Banks are shying away from unsecured lending market

Apnaloan.com Research Bureau

29 Apr 2008

Rising instances of defaults and recovery woes have led banks to shy away from lending to the unsecured market.

The Reserve Bank of India's report on Macroeconomic and Monetary Developments 2007-08 shows the rate of growth in the personal loan portfolio of banks has dipped to 13.2 per cent to Rs. 58,669 crore as on February 15, 2008, compared with 30.6 per cent in the same period last year.

Major players such as ICICI Bank, Citifinancial and GE Money have refrained from growing their uncollaterised lending portfolio largely on account of deteriorating risk return ratio.

Stung by judicial intervention and regulatory raps following recent instances of excesses by recovery agents, private and foreign banks and non-banking finance companies exited the small ticket size personal loan segments (STPL). ICICI Bank, the country's second-largest bank, had stopped lending to borrowers from the sub-prime segment, while the biggest player in small loans, Citigroup, made its processes more stringent.

Despite the slowdown in the personal loan growth, outstanding on credit cards have risen 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 encouraging consumers to buy products through a credit card as it is more cost-effective and a quicker means of payment.

ICICI Bank, in its consumer goods financing, has moved from the post-dated cheque system to the credit card payment mode. This has increased the ticket size spending on credit cards.

Banks have clearly rebalanced their loan portfolio, which is evident from the rise in credit disbursements to the corporate sector.