Mumbai: Several banks have taken advantage of the economic slowdown to do some spring cleaning.
As loan defaults rose and consumers slowed spending in fiscal 2009, many lenders trimmed their riskier loans and improved the quality of their assets by reducing the share of unsecured loans in their total advances.
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State Bank of India (SBI), the country’s largest lender, lowered the share of its unsecured loans in its total advances to about 21% in the fiscal year ended 31 March from around 27% previously. Its total loans during the period increased 30% to Rs5.4 trillion.
Unsecured loans such as credit card advances, personal loans and overdrafts are not protected against collateral, but banks chased these aggressively between 2004 and 2007, when India’s economy grew at a fast 8-9%, for the high interest income these earn.
Depending on a borrower’s risk profile, banks charge a 15-20% annual interest rate for personal loans and up to 36% for credit card use. The default rate on personal loans was 8-9%, and on credit cards, 16-17%, according to bankers and analysts.
Credit growth, too, has slowed to 15.7% from as high as 30% in the previous years.
“Yes, we have slowed down on unsecured business. We have apprehensions that in a slowing economy, stability of jobs and the liquidity at the hand of an individual are cause for concern,” said Sujan Sinha, senior vice-president, retail assets, Axis Bank Ltd. “The individual...may over-leverage himself and repayments will be under pressure. It is quite prudent that we slow down offering unsecured loans,” sinha said.
Analysts don’t expect lenders to resume disbursing unsecured loans in a hurry.
“Although these loans were high yielding, the delinquencies were also very high. On a net-on-net basis, banks were making losses on these loans,” said Saikiran Pulavarthy, an analyst with Centrum Stock Broking Ltd. “ICICI Bank got badly hit in their unsecured loan portfolio and SBI’s credit card portfolio incurred huge losses.”
As on 31 March, ICICI Bank Ltd’s non-performing assets, or bad debt, increased to Rs4,553.94 crore from Rs3,490.55 crore a year earlier. Its share of retail loans was 49% of the total advances.
Interestingly, ICICI Bank, the country’s second largest lender that aggressively pushed unsecured loans the past few years, has increased the share of such advances in its overall loan portfolio in 2008-09 to 27% from 23% earlier. The lender, however, has reduced its total advances to Rs2.18 trillion from Rs2.26 trillion a year ago. “As compared to other banks, ICICI Bank’s loan book has not grown in the fiscal (year) ended March 2009. Unsecured loans also include loans other than retail, and hence the increase in absolute terms,” a spokesperson for ICICI Bank said.
Union Bank of India was the only big public sector bank that increased its share of unsecured loans in its total advances in 2008-09. A Union Bank executive, who didn’t want to be named, attributed this to increased use of corporate unsecured loans such as term loans and overdraft facility by its clients to overcome the liquidity pressure in September-October.
Pralay Mondal, country head, retail assets and credit cards, HDFC Bank Ltd, blames the slowdown in the banking industry and an increase in its secured loan portfolio for the decline in its unsecured loans business. HDFC Bank’s share of unsecured loans against its overall advances fell to 23% in fiscal 2009 from nearly 30% earlier.
Mondal said HDFC Bank’s assets last year included the retail portfolio of Centurion Bank of Punjab (CBoP), which it acquired in May 2008. CBoP had focused on a secured loan portfolio, he said. “It’s not that we are slowing on unsecured loans. We are actually very aggressive on our secured loan portfolio.”
“Our credit card business grew at 24% when the industry grew at 12-13%. We have a strict compliance check when we go for unsecured loans and we are very happy with our unsecured loan portfolio,” Mondal said but declined to give details of the bad debts in his bank’s unsecured loan portfolio.
Credit card business growth slowed to 12-13% in 2008-09 against about 45% in 2007-08.
Some analysts say the slowdown in the unsecured loan portfolio is temporary.
“It’s part of the business cycle. As and when the environment improves and stability returns, banks have to chase these assets if they want to grow,” said Jaiprakash Toshniwal of ULJK Securities Ltd. “These are all very high yielding assets after all.”
Graphics by Sandeep Bhatnagar / Mint