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Indian lenders have again turned circumspect on unsecured retail loans amid a deadly resurgence of the pandemic and localized lockdowns that has made collections challenging.

Unsecured loans, though riskier, earn a higher interest for banks. However, given that this portfolio is typically the first to take the hit for any extraneous stress, lenders want to go slow.

For instance, Kotak Mahindra Bank reduced the relative size of the unsecured book to 5.8% of its loan book in FY21 from 7.5% the previous year. While the private lender saw a tepid 1.8% growth in credit, unsecured loan segments such as personal loans, business loans and consumer durable loans (on an aggregate basis) contracted 28%. The bank’s credit card assets also shrank 16% during FY21.

The bank is much lighter and that enables it to take risks when the time is right, said Uday Kotak, chief executive officer, Kotak Mahindra Bank.

“We will certainly step on the gas and do credit underwriting and keep in mind there is a huge collection challenge going to come for the entire financial sector. Therefore, being light at this time is not a bad place to be at all," he said.

The collection challenge alluded to by Kotak, also the promoter of the bank, is what bankers believe will manifest from May onwards as executives fail to reach borrowers due to the pandemic.

The loss of income is also expected to dent borrowers’ ability to repay as the second wave of covid-19 engulfs India at a staggering pace.

Meanwhile, Axis Bank also expects collections to slow down in the coming weeks as infections continue to rise, impacting the movement of executives on the ground, its chief executive Amitabh Chaudhry had said on 27 April.

Private banks have a higher share of unsecured loans on their books, as compared to their state-owned peers. Unsecured loans form 15.6% of the aggregate loan book of private banks, whereas it is limited to 6.3% in their state-owned peers, showed data from Indian Ratings and Research.

In fact, if India’s largest lender State Bank of India (SBI) is excluded, the share of unsecured loans for public sector banks is even lower, at 4.9%.

According to a 16 March report from India Ratings and Research, the performance of unsecured asset classes such as microfinance loans, unsecured business loans and consumer loans is worsening, given the borrowers’ depleted financial cushions and the nature of these loans.

To be sure, the only segment that banks are comfortable lending to now and are extremely bullish on is home loans. Protected by a collateral, such mortgages are one of the safest retail assets and lenders are tripping over each other to give cheap home loans. However, the wariness with regard to unsecured loans remains across banks.

At IndusInd Bank too, there is a caution on unsecured loans. “We have always said that our unsecured portfolio is less than 5% of our overall loan book and that is the stated intent. We have felt that the unsecured portfolio takes time to build up and you need to have internal clients before you start scaling up this portfolio," said CEO Sumant Kathpalia.

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