At one end, the RBI is not comfortable with banks increasing their exposure to unsecured loans. But on the other, what seems to be outpacing the rest of the retail portfolio is clearly unsecured loans. On an average, private banks have posted at least 30-35 per cent growth in the unsecured portfolios for the June quarter compared to a year ago, whereas growth in the retail segment is around 20-22 per cent. Barring Bajaj Finance, the leading non-bank in the consumer lending space, the commentary from rest of the industry remains quite sanguine with respect to asset quality.

Therefore, for the sector, unsecured loans may not pose a threat from an asset quality perspective just yet. The reason why banks are chasing these loans is causing a bit of discomfort — to maintain yield and profitability — which should be the outcome of a business and drivers of a business. Having jacked up bet interest margin or profitability over 100-120 basis point since September 2021, banks are at a juncture where they cannot afford to compromise on this aspect. No doubt then that every bank, especially in the private space, wants to have at least 15 per cent of their retail portfolio coming from unsecured loans constituted by a mix of microfinance, personal loans, credit cards, and a bit of unsecured small business loans. The apparent advantage these loans hold is the direct contribution to yield.

If the average yield of a bank is 9-10 per cent, unsecured loans can earn at least 400-500 basis points more than the average. In a low interest rate regime, the proportion of unsecured loans to secured may not matter much because cost of doing the business is favourable. But when interest rates increase, these products offer the best shield against increasing rates. Sample this: cost of funds across banks increased by over 70 basis points year-on-year in Q1. The resultant impact on NIM or net interest margin, which is a measure of profitability, was curtailed at 30-40 basis points. It won’t have been possible without a faster growing in the unsecured portfolios. Most of these loans haven’t seen a huge increase in interest rates because they are invariably guided by MCLR, which resets twice or four times a year, depending on the product. Therefore, while pricing tends to be almost uniform across banks, it’s a direct play on volume. As much as the regulator and market observers call out the risks in these loans, the truth is that growth in this segment is here to stay.

The granularity and volumes that come to play will help push the can till the sector spots it’s the next best opportunity. Till then, it’s advantage unsecured retail loans.