Despite RBI measures, unsecured personal loans by banks grow; ICICI leads pack

Despite the Reserve Bank measures wherein it ordered banks to set aside 25 percentage more capital as risk capital for these loans, the personal loan books for the top five banks have only been growing.
Image used for representational purposes.
Image used for representational purposes.(Express Illustration)

Mumbai: The second largest private sector lender ICICI Bank has the highest exposure in the unsecured personal loan segment at 13.8 percent, while at the system level it is 8.7 percent as of the December 2023 quarter, according to an analysis.

The system-wide exposure has more than doubled since March 2018 when it was only 4 percent, while the system level bad loans in the segment rose by 70 bps to 10.4 percent, the analysis further noted.

It can be noted that sensing a likely bubble in the system as lenders were pushing unsecured loans to the limits, on November 21, 2023, the monetary authority had whacked up the risk weighted capital ratios for all types of unsecured loans by 25 percentage points to 125 for banks and non-banking lenders personal and other unsecured loans and for credit cards the prudential capital requirement to 150 percent. On a systemic level, this has led to a credit cost on lenders to the tune of 45-50 bps.

But looking at the latest numbers, it seems, the measure has not yet delivered the desired results, as for all lenders their unsecured books have only grown between the September and December 2023 quarters.

At 11.3 percent, the third largest private sector lender Axis Bank has the second highest exposure, according to a UBS Securities analysis of the data from banks, the Reserve Bank and credit bureaux.

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The next is the largest private sector lender HDFC Bank, which has a loan book of over Rs 25 trillion as of March 2024 of which 11.1 percent are unsecured personal loans, including credit card outstandings.

It can be noted that the bank is the largest in the credit card space too. HDFC Bank had been the market leader in the retail loan segment for decades, as these types of loans are of mid-term tenor varying from one to three years normally, and used to have the least risks but much higher margins/yields.

Only at 5.8% in 2020

The nation’s largest lender State Bank, on the other hand, comes at the fourth slot with 10.7 percent of its book being in the unsecured category and the fifth largest Kotak Mahindra Bank comes next with 9.2 percent.

What is interesting is that despite the Reserve Bank measures wherein it ordered banks to set aside 25 percentage more capital as risk capital for these loans, the personal loan books for the top five banks have only been growing.

In the September 2023 quarter, these ratios stood at 13.3% for ICICI Bank, 11.4% for HDFC Bank, 10.8% each for Axis and SBI and 8.7% for Kotak. At the system level, this was only 8.6 percent in the September quarter.

A comparison to March 2020 makes it easier to understand the level of growth that personal loans clocked, when at the system level it was only 5.8 percent, and then HDFC Bank led the chart with 17.4 percent of its total loan book in the unsecured category but since then the bank has been bringing it down steadily.

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ICICI Bank, which leads in this segment now, was at 9.4 percent in March 2020 but has been steadily building it up since then with each quarter showing uptick.

On the other hand, SBI’s personal loan book stood at 7.2 percent in March 2020, while that of Axis Bank at 9.6 percent and for Kotak at 4.9 percent, which as of December is almost double for this lender.

In fact, a March 2019 comparison offers a clearer picture, as between then and now, even at the system level the unsecured book has almost doubled from 4.6 percent to 8.7 percent.

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For these top five lenders, the same stood at 17 percent for HDFC Bank, 8.4 percent for Axis, 7.4 percent for ICICI, and 5.8 percent for the State Bank.

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