Personal loan growth slows, but banks haven’t given up on it
- Most lenders said in their third-quarter earnings calls that they will continue to expand the portfolio in the coming quarters given that the bulk of the exposure is to salaried account holders and overall portfolio quality remains robust.
Mumbai: Indian banks turned cautious on personal loans after the regulator’s warnings and rising stress in collateral-free advances and microloans, slowing growth in one of their fastest-growing segments. Yet, far from giving up on it, they continue to bet on such lending to grow.
Most lenders, in their third-quarter earnings calls, guided that while growth may have slowed for a quarter or two, a majority of their customers continue to pay on time. They will continue to expand the portfolio in the coming quarters given that the bulk of the exposure is to salaried account holders and overall portfolio quality remains robust.
While the banking sector, including State Bank of India, has seen some slowdown in this segment, the lender’s portfolio is different because the bank typically only lends to salaried customers that have accounts with SBI, said CS Setty, chairman of India’s largest lender by assets, at the Q3 earnings conference.
“Our (unsecured personal loan) portfolio is showing good growth in the current quarter, which means that whatever lower growth we had in the last three quarters, we were able to reverse that,” Setty said, adding that while the earlier levels of 30-32% compound annual growth rate (CAGR) may not be possible, it will “definitely come back to double digits”.
Among retail loans, the express credit segment is SBI's second largest after housing loans, accounting for 23.8% of retail loans and 8.5% of total bank advances as of December. The high-yield and margin-accretive segment is important for most Indian lenders, given the increased demand after the pandemic and muted corporate loan growth.
Yet, banks dialled down on collateral-free or unsecured credit to individuals after a period of lending frenzy. A worried central bank made banks and non-banks set aside more buffers against these loans by increasing risk weights by 25 basis points. Defaults rose as expected. According to Fitch Ratings, stress in unsecured retail loans, including personal loans and credit cards, contributed around 52% of new bad retail loans in the first half of the ongoing fiscal through March 2025.
The caution resulted in a slower pace of expansion. Unsecured personal loans grew 11% in the first half of FY25 ended September, compared with a CAGR of 22% in the three years through March 2024, according to the Fitch report. RBI data shows growth eased further after that. In the nine months ended December, the category grew 5.4%, at about a third of the pace of 16.5% a year earlier.
“We had slowed down personal loans following the regulator’s warnings,” YS Chakravarti, managing director at Shriram Finance Ltd, told Mint in January. “But our aim is to grow our personal loan book because we are very confident. We don't give loans to outsiders; our loan book to non-customers is only about 5%. That's the reason why we want to grow our book, and it will slowly inch up.”
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He said the non-bank lender will offer personal loans to existing customers who have finished one loan cycle, adding that the portfolio is expected to grow at around 20-25% in FY25. Shriram Finance's personal loans book contracted 9.3% on-year but grew 4.6% sequentially to ₹8,651 crore in Q3, comprising 3.4% of the total assets under management.
Even ICICI Bank Ltd., which was aggressively growing the book, went slow after the regulatory warnings and asset quality concerns. But the private lender will continue to grow the portfolio, albeit with tighter underwriting and risk parameters.
The slowdown in personal loan growth to 9% in Q3 from mid-30 levels in the year-ago period was “a conscious decision” based on “risk assessment” and tighter underwriting, ICICI Bank’s executive director Sandeep Batra said during its Q3 earnings conference. The portfolio grew 8.8% on-year to ₹1.2 trillion during the quarter, comprising 17.2% of total retail loans.
Batra said the bank is happy to continue to lend to “quality customers” in the segment.
Bank of Baroda, too, is eyeing healthy growth in the personal loan portfolio. The state-run lender had announced going slower on personal loans in July 2023, much before the industry raised any issues, guiding for a 30-35% growth, said Debadatta Chand, managing director and chief executive, during the Q3 media call.
The bank is now focusing on the quality of underwriting and lending more to salaried and customers with high credit scores, and it is comfortable targeting a growth of 25-30% in personal loans. The segment grew 24% on-year and 7% on-quarter in Q3 to ₹34,340 crore for it.
Lending via fintechs
Banks’ push for digital distribution and partnerships with fintech platforms is also expected to drive personal loan growth, according to industry experts.
Fintech non-bank lenders’ digital personal loans declined 10% on-year in the first half ended September, according to a report by the self-regulatory organization Fintech Association for Consumer Empowerment (FACE).
While fintech loans accounted for 12% of the sanction value of ₹49,000 crore in H1 FY25, they comprised 76% of the sanction volume, focusing on small-value loans, according to the report. Similarly, fintech NBFCs account for 5% of the total value of personal loans outstanding as of September 2024, but they contribute 44% of the active loans.
In 2024, L&T Finance Ltd, SMFG India Credit Company Ltd, Shriram Finance Ltd and Yes Bank Ltd tied up with CRED, Paytm and Paisabazaar to sell unsecured personal loans.
Last month, Piramal Capital and Housing Finance Ltd tied up with digital platform MobiKwik to offer personal loans. Eligibility criteria for these loans include a minimum monthly income of ₹25,000 and a borrower age between 23 and 55 years. The loan tenure is 6-12 months and customers can avail equated monthly installments (EMIs) of ₹50,000 to ₹2 lakh.
The non-bank financial company’s salaried personal loan assets under management rose 111% on-year in Q3. During the analyst call on 27 January, managing director Jairam Sridharan said the business is “holding up very good”.
"Q3 was actually even better than Q2 in terms of horizontal risk in salaried personnel loans,” Sridharan said. “So, I continue to feel good about both salaried personal loans and digital.”
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