The Hindu Business Line : Banks shying away from personal loans

Coimbatore, Aug 29 Look at the hoardings dotting your route to the office and you might get misled in more ways than one. Take the instance of some banks offering you personal loans. The advertisement hoarding makes it seem easy. And the face on the hoarding seems positively inviting and friendly.

Just try taking that a bit seriously. As did Mr. Sheik Sintha, a colleague, who approached a public sector bank.

He was told that the bank was not giving personal loans. Despite my colleague trying to reason with the branch manager that he had availed a similar loan two years ago and repaid his dues promptly, the official maintained that the bank was not entertaining personal loan applications any more.

When Mr Sintha asked the officer concerned about the advertisement, he was told that there was a policy of giving personal loans only to employees of designated companies that had a corporate tie-up with the bank. That is, if the employer agreed to settle the loan repayment through deductions from salary on a monthly basis, then the bank was willing to lend – not otherwise.

The officer also conceded that there were no ‘targets’ for personal loans unlike for car and home loans - explaining why bank officers are not enthusiastic about pushing these loans.

Selective selling

While public sector banks sell this product selectively, new generation and foreign banks have their target segments and were active players till very recently. They offer personal loans to self employed people at rates that range between 18 and 21 per cent and there are quite a few takers.

For instance, HSBC was disbursing 15,000 consumer loans a month at rates that were between 30 to 40 per cent till recently. But it also has decided to go slow in the personal loans disbursement.

Rising defaults

The caution that they show is in the backdrop of rising defaults by borrowers. And since these personal loans are taken typically by the relatively lower income group, which often borrows from multiple sources and at high cost, the prospects of defaults have been high. HSBC India’s CEO, Ms Naina Lal Kidwai, said, “We are not thrilled with what we are seeing in this segment. We are going slow.”

It must be mentioned that personal loans and credit card receivables of banks (both are unsecured loans) have grown steadily over the last five years. According to rating agency Crisil’s study on retail assets, these now formed an estimated one-fifth of the total outstanding retail loans as on March 31, 2008, up from 6 per cent as on March 31, 2004.