At a time when banks are teetering under the weight of corporate loans gone bad, unsecured loans – where individual exposures are smaller and more distributed – have been doing extremely well for them, riding on a surge in discretionary spending, increased availability of customer data, faster disbursements driven by technology, and reduction in interest rates in some segments.
Between fiscals 2015 and 2018, such credit – comprising personal, small and medium enterprise (SME), and credit card loans – clocked a compound annual growth rate (CAGR) of 27%, or almost four times growth in bank credit, an analysis by CRISIL Research shows.
Given attractive yields – return on assets are 2.5-3.0% for personal and SME loans, and 3-4% for credit cards, compared with less than 2% for home loans and new passenger vehicle loans – financiers are expected to maintain sharp focus on the segment.
However, competitive intensity is increasing, and has manifested in the form of lower rates in some segments such as personal loans. In unsecured SME loans, rates have remained sticky, but average tenure and commissions paid to direct selling agents have increased.
As of March 2018, outstanding unsecured loans stood at ~Rs 5 lakh crore, accounting for 26% of retail lending, compared with 21% three years ago.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Over the next three fiscals, the pacy growth rate would decelerate a bit, but would still move at a 24-25% CAGR clip. Consequently, outstanding unsecured loans should reach ~Rs 9.5 lakh crore by fiscal 2021.”
Asset quality could deteriorate marginally in the near term, especially in unsecured SME lending, because demonetisation and the implementation of the Goods and Services Tax have had material impact in that space.
Gross non-performing assets (GNPAs) in unsecured loans have declined considerably, compared with the double-digit levels seen a decade back.
Financiers have been able to control asset quality – one-year lagged GNPA in unsecured personal loans was ~3% as of March 2018 – through better risk management practices, greater use of technology, and sharper focus on cross-selling to existing credit-tested customers. For example, 85% of personal loans offered by banks are to salaried customers, and 70% of loans are through cross-selling.
In SME loans, pushing small-ticket credit and adoption of technology and data analytics have kept delinquencies low. Besides, lenders are proactively using data from credit bureaus to improve risk assessment and detect frauds.
Going forward, lenders need to remain watchful and disciplined in credit underwriting because unsecured loans are vulnerable to economic downturns and liquidity squeezes.
Says Ajay Srinivasan, Director, CRISIL Research, “While profitability is likely to drop because of intensifying competition, better data availability and higher credit costs, unsecured loans will remain a highly attractive segment for lenders. Successful ones will be distinguished by the ability to cross-sell well, disburse quickly by leveraging technology, and maintain robust underwriting and risk management practices.”