The big surge in unsecured loans

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Unsecured loans to continue their onward march
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, almost four times the approximately 7 percent growth in bank credit. This comes at a time when banks are teetering under the weight of corporate loans gone bad. As of March 2018, outstanding unsecured debt stood at approximately Rs 5 lakh crore, accounting for 26 percent of retail lending, compared with 21 percent three years ago.

Unsecured lending is growing at a healthy pace CRISIL Research expects the overall unsecured loan portfolio to clock 24-25 percent CAGR over the next three years to Rs 9.5 lakh crore by fiscal 2021, driven by higher credit penetration in existing markets and increasing focus of lenders on smaller cities.

Key factors driving growth
The growth in this segment is contributed by a host of factors such as-

» Increase in discretionary spending among Indian consumers, visibly seen in growth of Private final consumption expenditure (PFCE) with a CAGR of 11 percent over the last three years and increase in outbound tourists in India clocking a 9.4 percent CAGR from FY 11 to FY16.
» Increased availability of data with credit bureaus, as seen in steady rise of number of records in the database of a credit bureau from around 150 million as of March 2010 to over 600 million as of March 2018.
» Technology aided faster internal processes resulted in reduction of turnaround time (TAT) from 15 days to 2-3 days for SME loans. For unsecured retail loans, many players have pre-approved loans offers, ready for disbursal.
» Reduction of rates in select segments, such as personal loans for prime salaried customers/ category ‘A’ corporate salaried employees, which has helped increase offtake.
» Growth in acceptance infrastructure (deployment of POS terminals) and growth of organised retail, which has boosted credit card usage as reflected in 10 percent CAGR growth in average spends per credit card between FY15 and FY18.
» Subdued property prices along with limited availability of collateral and ease of availability of loans resulted in increased demand for unsecured SME loans

Asset quality risks largely mitigated but remains susceptible to economic downturn
Financiers have been able to control asset quality – one-year lagged GNPA in unsecured personal loans was approximately 3 percent as of March 2018 – through better risk management practices, greater use of technology, and sharper focus on cross-selling to existing credit-tested customers. For example, 85 percent of personal loans offered by banks are to salaried customers and 70 percent of loans are through cross-selling.

Going forward, lenders need to remain watchful and disciplined in credit underwriting because unsecured loans are vulnerable to economic downturns and liquidity squeezes. Additionally, there is another area of concern in the form of debt spiral. Ease in availability of unsecured loans combined with increase in credit uptake can make people borrow and spend much more than they can afford.

Profitability to come down marginally
Given the rather attractive returns on unsecured loans, financiers are expected to maintain their sharp focus on this segment.
Asset quality could deteriorate marginally in the near term, especially in segments such as unsecured SME lending where entities have been hurt by demonetisation and the implementation of the Goods and Services Tax (GST). Yields also are likely to come down with heightened competition and better availability of data.
Overall, though profitability is expected to come down from current levels due to rising competition and higher credit costs, it is still likely to remain attractive.

Three drivers of success
CRISIL Research believes three key factors will distinguishing the successful players in the unsecured lending segment. These are:
» Cross-selling more products to existing customers whose credit worthiness is tested
» Quicker disbursements through greater focus on technology
» Strong underwriting and risk management practices to control asset quality

The author is director of CRISIL Research.

The thoughts and opinions shared here are of the author.