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MUMBAI : Led by spruced-up mobile apps, pre-approved loan limits and quicker sanctions and disbursal, public sector banks are witnessing a surge in demand for personal loans as consumption gathers pace.

State-owned lenders such as Bank of India, Bank of Baroda and Punjab National Bank have seen strong growth in this segment. While State Bank of India (SBI) has always stood out for its digital banking initiatives, which are on a par with the private sector, other lenders are catching up.

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Bankers said the availability of digital pre-approved loans on the lines of what top private banks have had for some time now has helped. These loans, though unsecured and riskier than those backed by collateral, offer better returns.

“The reason we have seen the acceleration in personal loans is that this was an under-exploited franchise for us," Sanjiv Chadha, chief executive of Bank of Baroda, told analysts on 1 August.

The bank’s personal loans nearly tripled over the past year to 12,050 crore, three-fourths of which was given to salaried customers, lowering the risk of delinquencies.

According to Chadha, with a good “data lake" in place and, more importantly, an efficient digital interface through the Bob World app, the bank can tap the customer base to offer them these opportunities. To be sure, the bank has started from a low base and, therefore, the growth might appear large in percentage terms.

“When we began about a year back, we had the ticket size restricted to 50,000, and now we are going up to, I think, 5 lakh," he said, adding that the growth the bank is seeing is significant enough to add to overall retail loan growth and also to its retail business margins.

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At Bank of India and Punjab National Bank, personal loans grew 97% and 26%, respectively, in the June quarter, when compared with the previous year.

“It is not a conscious strategy as such but a trend that the industry is witnessing, and we are part of that. In the past two-three quarters, there has been a huge growth in personal loans across banks, and we will see how the credit market plays out in that segment and, accordingly, take a call," P.R. Rajagopal, executive director, Bank of India, said on 2 August.

Traditionally, personal loans have been the forte of India’s private lenders, backed by tech-driven loan underwriting capabilities. While they, too, saw rising stress in this segment in the initial years, private banks have been able to learn from the experiences and develop better models and data analytics. As a result, experts are now circumspect over the ability of state-owned banks—more used to underwriting corporates and small businesses—to be able to protect their portfolios in case of another widespread stress scenario like covid-19.

These consumption loans, categorized as other personal loans in monthly data released by the Reserve Bank of India (RBI), saw a 24% year-on-year (y-o-y) growth in June to 9.24 trillion. Among all retail credit categories, total “other personal" loans were second only to housing loans, showed RBI data.

Prakash Agarwal, director and head of financial institutions, India Ratings and Research, said the sharp growth in personal loans, to a large extent, could be reflective of pent-up demand as much as it is on account of recovery in fundamentals.

“The segment has also benefited as data availability in the system has improved significantly over the years, and borrowers have become mindful of credit bureau records as it could impact their credit access," Agarwal said. However, he cautioned that while data and the credit bureau system are effective shields against intentional challenges, they may be of limited effect in case a borrower faces cash-flow issues.

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