Corporate Loans (also known as Commercial Loans). As we analyse the balance sheets of various banks, especially the private sector ones, the gradual tilt over the last decade is also evident in favour of the Retail Loan sector. Public sector banks are handsomely catching up with the private sector banks in this field as they move more from the corporate loans to retail loans.
Various schemes are being launched to attract the attention of the retail segment: the people like you and I. Banks (as well as NBFCs) offer personal loans in less than a minute, some like HDFC Bank in ten seconds. Various names of these schemes: payday loans, EMI based consumer loans, holiday loans, Loan Pe Phone, Phone Pe Loan, On Line Loans etc.
A key feature of majority of the personal loans is that these are unsecured loans. Means you don’t need to provide a collateral security to avail these loans.
Growth in this retail or personal loan segment from 2010 (Rs. 5.90 lac crore) to 2018 (Rs. 19.30 lac cr) has been much higher as compared to the corporate or commercial loans.
Credit Card (which is also a loan) outstanding during the same eight years has been from Rs. 19,580 cr to Rs. 74,400 cr.
Reason for this growth: the main reason is meltdown of the global economy in 2008 in the midst of American Investment Banking crisis. The banks then changed their lending from wholesale to retail. The ticket size in retail lending is way smaller than that of wholesale lending. Earlier there were mainly two categories of the personal loans: home loans and auto loans. In both these, there was clear, visible collateral security. Now the unsecured loans have gone much ahead as compared to these two types of secured loans.
The purpose for such personal loans could be varied. Loans for marriage, honeymoon, child birth, holiday, education, purchase of appliances, functions, furnishing etc., etc. These are also mainly short term loans. The average Indian has shed the earlier generations’ social stigma of being labelled as a borrower. The current day borrower is more confident and capable of handling debt. Very often both husband and wife are from working class and they take a borrowing decision jointly.
The profile of average borrower is that it is from the salaried class (mainly), is 25-50 years of age, is highly educated and comes from a large city. But even this profile is slowly changing. More and more people from B and C class cities are borrowing who are not much educated and are from self employed category. As the life span in India is increasing, the age of such borrowers can also be over 50. This is more evident in the credit card portfolio where the number of cards have crossed a mark of 4 cr.
Whatever one may say, the above shifting patterns are also derisking (reducing) banks’ retail loan portfolio risks.
Often I am asked as to what is the right amount for a personal borrowing. Leaving Home Loan apart, the thumb rule is that one should not borrow an amount which has a repayment obligation of over one third of your actual household income.
Keep a ceiling of 33% of your salary + interest income + dividend income + rent income + income of the spouse. Please remember your credit card usages are also your borrowings. Such usages are also to be factored in.
If the borrowing touches 40%, it is a cause for worry.
