Easy availability of consumer loans along with rising discretionary spending has increased unsecured loan book by four times during the past three years, says a Crisil report. Unsecured loans are given without any collaterals and therefore banks charge a higher interest rate for such loans. Personal loan and spending on credit cards fall under the unsecured loan category. Banks enjoy higher margins in the unsecured category given the higher interest rate charged from borrowers.

Crisil said in a report today, “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 per cent, or almost four times growth in bank credit,”

Outstanding unsecured loans stood at around Rs 5 trillion as of March 2018, accounting for 26 per cent of retail lending. Three years ago the figure was at 21 per cent.

There are many reasons for the sharp rise in unsecured loans ranging from an increase in discretionary spending and easy availability of credit. Recently disbursements have also increased due to easy loans given by fintech companies. These companies mostly give loans to people who don’t have any credit history and find difficulty in getting loans from banks.

Return on assets are 2.5-3 per cent for personal and SME loans, and 3-4 per cent for credit cards, compared to under 2 per cent 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.

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

The rise in unsecured loans can be a cause of concern for banks as they do not have any collateral to back these loans. Any increase in default in this category can badly affect the banking industry, which so far has faced very low level of defaults from retail borrowers.

(With PTI Inputs)