Why has there been a surge in unsecured loans?
verall, the discussion sheds light on the ongoing debate about the risks and benefits of unsecured loans in the banking sector and emphasises the importance of cautious and prudent lending practices by financial institutions.
In this podcast, businessline’s Hamsini Karthik talks about the Reserve Bank of India’s (RBI) view on unsecured loan exposure for banks and the reasons behind their discomfort with high levels of unsecured loans. Unsecured loans are loans that are not backed by collateral or any security, which means that if the borrower defaults, the bank does not have any recourse to recover the money.
The podcast highlights that unsecured loans have been on the rise in the past few years, with a significant portion of total retail loans being unsecured. The ease of sourcing and faster processing of unsecured loans has led to their popularity among banks, resulting in a higher growth rate for this segment.
One of the major concerns raised is the potential risk associated with unsecured loans. If borrowers face financial difficulties, such as changing jobs or experiencing a drop in income, they may be tempted to default on the loan, and the banks may not have a strong means to recover the money.
The podcast also touches on the potential risks of job market fluctuations and the overall economic situation. The growth of unsecured loans heavily relies on the stability and growth of the job market, particularly in the IT sector, which contributes significantly to unsecured loan demand. If job market conditions deteriorate, it could lead to higher delinquencies in the unsecured loan segment.
The RBI and banks are cautious about this growth in unsecured loans, as it can be a tricky game. While unsecured loans offer higher yields currently due to lower operating costs, there is a risk that banks may continue to chase this high-yield game even when it becomes risky, leading to potential pitfalls.
The podcast concludes with the recognition that banks need to carefully monitor their unsecured loan exposure, as it could become a precarious situation in the medium term. However, since there is no data available from external sources, it remains uncertain how this situation will unfold.
Published on August 3, 2023