Banks' unsecured loan book has grown four times the bank credit during the past three years, helped by a rise in discretionary spending...

Banks' unsecured loan book has grown four times the bank credit during the past three years, helped by a rise in discretionary spending, technology-driven disbursements and lower interest rates, says a report. Unsecured loans are the loans where individual exposures are smaller and more distributed and given without any collaterals but banks get higher margins. Typically personal loan, education loans, and credit card spend fall under this category of loans.

Outstanding unsecured loans stood at around Rs 5 trillion

"Between fiscals 2015 and 2018, unsecured credit - comprising personal, small and medium enterprise (SME), and credit card loans - clocked a compound annual growth rate (CAGR) of 27 percent or almost four times growth in bank credit," Crisil said in a report today. As of March 2018, outstanding unsecured loans stood at around Rs 5 trillion, accounting for 26 percent of retail lending, compared to 21 percent three years ago.

SME loans

Growth in unsecured loans is on account of a surge in discretionary spending, increased availability of customer data, faster disbursements driven by technology, and lower interest rates in some segments. The report said financiers are expected to focus more on this segment due to attractive yields. Return on assets is 2.5-3 percent for personal and SME loans, and 3-4 percent for credit cards, compared to under 2 percent for home loans and new passenger vehicle loans, it said, adding rising competition has led to lower rates in some segments such as personal loans.

Financiers are expected to focus more on this segment due to attractive yields

In unsecured SME loans, rates have remained sticky, but average tenure and commissions paid to direct selling agents have increased, it said.