State-owned banks see an increase in digital personal loans

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Public lenders such as Bank of India, Bank of Baroda and Punjab National Bank have seen strong growth in this segment. While the State Bank of India (SBI) has always stood out for its digital banking initiatives, which are on par with the private sector, other lenders are catching up.

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Bankers said the availability of digital pre-approved loans modeled on what major private banks have had for some time now has helped. These loans, although unsecured and riskier than collateral-backed ones, offer better returns.

“The reason we saw the acceleration in personal lending is that it was an underutilized franchise for us,” Sanjiv Chadha, chief executive of Bank of Baroda, told analysts on Aug. 1.

The bank’s personal loans have nearly tripled over the past year to 12,050 crore, three-quarters of which was given to salaried customers, reducing the risk of non-payment.

According to Chadha, with a good “data lake” in place and, more importantly, an efficient digital interface through the Bob World app, the bank can leverage the customer base to provide them with these opportunities. Admittedly, the bank started from a low base and therefore the growth may seem significant in percentage terms.

“When we started about a year ago, we limited ticket sizes to 50,000, and now we’re going up to, I think, 5 lakh,” he said, adding that the growth the bank is experiencing is significant enough to contribute to overall retail lending growth and also to its trading margins.

At Bank of India and Punjab National Bank, personal loans increased by 97% and 26%, respectively, in the June quarter, compared to a year earlier.

“It’s not a conscious strategy as such, but a trend the industry is witnessing, and we’re part of it. Over the last two or three quarters, there’s been huge growth in personal loans in all banks, and we will see how the credit market develops in this segment and accordingly we will take a call,” PR Rajagopal, Executive Director, Bank of India, said on August 2.

Traditionally, personal loans have been the forte of Indian private lenders, backed by technology-driven loan underwriting capabilities. While they also saw increased tensions in this segment in the early years, private banks were able to learn from these experiences and develop better data models and analytics. As a result, experts are now wary about the ability of public banks – more accustomed to underwriting corporations and small businesses – to be able to protect their portfolios in the event of another widespread crisis scenario like covid-19.

These consumer loans, classified as other personal loans in monthly data released by the Reserve Bank of India (RBI), grew by 24% year-on-year (YOY) in June to reach 9.24 trillion. Among all categories of personal credit, total “other personal loans” came second only to home loans, RBI data showed.

Prakash Agarwal, director and head of financial institutions, India Ratings and Research, said the strong growth in personal loans, to a large extent, could reflect pent-up demand as much as recovering fundamentals.

“The segment has also benefited from the availability of data in the system which has improved significantly over the years, and borrowers have become aware of credit bureau records as it could impact their access to credit,” Agarwal said. However, he cautioned that while data and the credit bureau are effective shields against intentional challenges, they may have limited effect in the event a borrower faces cash flow problems.

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