Why banks keep offering you pre-approved loans

There was a growth of 28.60% credit card accounts between December 2017 and December 2018, according to data from credit bureau TransUnion Cibil Ltd. Similarly, personal loan accounts also increased by 29.30% over the same period. On the other hand, home and auto loan accounts grew only slightly over 10%, while home loan accounts also grew over 30% during the period.

“There are two types of borrowing by consumers. One is asset-based borrowing, such as borrowing to buy or build a house. The other is consumption-oriented, like a ready for vacation or wedding. What we have seen over the past couple of years is a recovery in consumer-driven loan demand,” said Ambuj Chandna, Head of Consumer Assets, Kotak Mahindra Bank.

Indeed, the share of personal loans in the overall outstanding balance of banks’ loan portfolios has also increased steadily. Retail loans accounted for about 27% of total loans outstanding in April 2007, which gradually declined to 18% in April 2013, but reached 26% in January this year, according to data from the Reserve Bank of India or RBI (see graph).

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So why are banks pushing retail lending and what are the factors contributing to this trend?

commercial attraction

As a retail borrower, you are less likely to default on a loan compared to other borrowers.

Increasing non-performing assets in the corporate and MSME lending segments over the past few years have pushed banks to seek credit growth in the retail lending segment, said Gaurav Aggarwal, head of unsecured lending at Paisabazaar.com, a financial services aggregator. “As of September 2018, the gross NPA ratio (GNPA) in the industrials and services segments was 20.9% and 6%, respectively, while the GNPA ratio in the retail lending segment was only 2. 1%,” he said.

The RBI data also shows that new slippages in the recent past have been higher in the agriculture, industrials and services segments, compared to retail.

Anil Gupta, Sector Head, Financial Sector Ratings, Icra Ltd, said asset quality was decent for banks even in the credit card segment, which is the riskiest segment of retail lending. The NPA level in the credit card category is below 2%, he said.

Some bankers disagree that the focus on retail is because it’s less risky or yields better returns. “The change is not because retail is more attractive from a yield standpoint. We are also focusing on other segments like agriculture or services or businesses. But the momentum is currently in retail and therefore growing faster. The ecosystem continues to evolve and I see it continuing for quite some time,” Chandna said.

Data analysis

But how do banks determine which product to offer to which customer? Your transaction patterns with a bank give a lot of information. For example, if you repeatedly spend on movie tickets using the Online banking facility, the bank is likely to offer you a co-branded credit card that has some related benefits. In such a case, you are more likely to buy this product than other customers.

The combination of better risk assessment, an ability to analyze behavior and target specific products is leading to an increase in the number of personal loans and credit cards.

Banks’ improved abilities to analyze consumer behavior from their own database as well as data from credit bureaus have greatly improved their ability to assess the risk of retail loans for specific customers. “The stabilization of the credit bureaus over the past 10 years and their ability to provide us with good quality consumer information has helped the industry have a better risk appetite than it did a year ago. five to six years,” Chandna said.

In addition, he said, significant investments have been made in improving banks’ data analysis capabilities. “We have become data rich ourselves and are able to leverage customer behavior with us, combining it with their office behavior data and the quality of customer understanding has improved,” he said. -he declares.

Ease of taking out loans

Besides risk analysis and assessment, credit availability has also improved rapidly in recent years. “Increased adoption of digital channels and faster loan disbursement processes have also increased access to retail lending products, driving demand. All this has contributed to the increase in the share of loans to individuals,” said Aggarwal.

Gupta said retail borrowers have been underserved in terms of credit availability in the past. “It was very difficult to get a home loan or a car loan about 15-20 years ago. Now it has become very easy. The ease of taking out loans and converting them into EMIs is also boosting personal loan consumption. This is evident from the fact that even within personal lending, the segments that are growing at an accelerating rate are credit cards and personal loans. Other retail segments like home or car loans are growing at a normal rate,” he said.

For example, Chandna said, taking out an unsecured personal loan for you as a customer is now just a tap away from your mobile banking app and the money arrives in your account. “It’s radically different from the past. Just three or four years ago, taking out a personal loan was a 15-day exercise,” he said.

What should you do?

As a consumer, easier availability of credit is indeed helpful for those who need it, but avoid taking out unnecessary loans or multiple credit cards that you may not need. Defaulting on a loan or credit card could affect your credit profile and hamper your chances of getting a good deal on a loan when you really need it.

Borrow responsibly and only when you need it. If you don’t need a loan or don’t have the ability to repay, disconnect all those calls.

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