KOCHI: Private sector lenders are banking on giving out unsecured loans — funds without collateral assets — at a time when the $2 trillion-economy is reeling under a massive non-performing assets crisis caused by corporates and high net-worth individuals.
Outstanding unsecured loans are expected to reach about Rs 9.5 lakh crore, with a CAGR of 24-25 per cent by fiscal 2021, compared to Rs 5 lakh crore as of March 2018, a report by ratings company CRISIL revealed.
Unsecured loans, namely SME credit, personal loans and credit card purchases, are considered to be risk averse due to a limited exposure to default and come with a higher rate of return.
Higher purchasing power, awareness about financial products, penetration of technology and lower interest rates in some segments has led retail credit to grow 26 per cent of total unsecured loans from 21 per cent in 2015, the report said.
Financiers have also been able to manage asset quality of the unsecured loan portfolio through data from credit bureaus and their focus on cross-selling to existing customers, CRISIL said.
The one year-lagged GNPA in unsecured personal loans was about 3 per cent, as of March 2018.
NBFCs like Kerala-based Muthoot Finance, OpenTap and Flexiloans have been spreading roots in smaller cities and expanding into newer portfolios like personal loans and SME credit.
“We are planning to build a portfolio of Rs 3,000 crore under personal loans for salaried individuals by 2023. By the end of FY19, we are aiming to reach more than 20 cities in South India and lend about Rs 300 crore to salaried people,” said George M Alexander, Executive Director, Muthoot Finance Ltd, to The New Indian Express.
“We want to reach out to a broader segment of the market, ie, people who have been denied loans from banks. This segment is growing because of many people entering the formal workforce system in the economy,” Alexander added.
Muthoot Finance has about 4,500 branches and more than 1 crore customers.
The SME credit sector, which has more than 50 million small and medium enterprises contributing to about 45 per cent of the nation’s GDP, is also highly underserved.
“While profitability is likely to drop because of intensifying competition, better data availability and higher credit costs, unsecured loans will remain a highly attractive segment for lenders. Successful ones will be distinguished by the ability to cross-sell well, disburse quickly by leveraging technology, and maintain robust underwriting and risk management practices,” said Ajay Srinivasan, Director, CRISIL Research.