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Unsecured loans are rising fast and that’s not good for banks
July 26, 2023
In recent months, there has been a significant jump in the retail book of banks, particularly credit cards and other personal loans. In the 12 months ending May 31, credit card outstanding has grown by close to 30 percent, almost at the same pace as the preceding 12 months. The overall industry loan growth has been 15.6 percent. It’s not just credit card spending, other personal loans, too, have grown around 23 percent from the previous year.
These are unsecured loans banks do not have collateral against them. In the event of a credit failure, lenders will be sitting ducks, not a healthy scenario for an industry that has just about managed to get its books in order.
Some early signs of stress are already visible. While announcing the April-June quarter earnings, private lender Kotak Mahindra Bank said its chunk of unsecured retail loans as a percentage of the total book grew close to 11 percent from 7.9 percent in the year-ago quarter. Retail microfinance loans surged 91 percent over the year-ago quarter and credit card outstanding jumped 67 percent.
Retail microloans are extended to low-income groups which are typically small businessmen and vendors. These loans are tricky as cash flows typically take a hit during a down cycle. The trend is in line with the industry where banks are stepping up lending to unsecured loans post Covid.
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