Unsecured loans: Improved outlook fuels expansion

Indian banks are gearing up to cautiously expand their unsecured loan portfolios, encouraged by signs of improving asset quality and easing stress in key segments such as personal loans and credit cards.

Bankers have indicated that the pressure in the unsecured lending space, particularly in personal loans and credit cards, is showing a steady decline. This trend is prompting a more optimistic, yet measured, stance on future lending in the segment.

"The behaviour of our unsecured portfolio is panning out broadly as we had predicted," said Ashok Vaswani, MD & CEO of Kotak Mahindra Bank. "The stress in personal loans continues to show a reducing trend, while the credit card portfolio has plateaued-we hope to see a decline in the second half of the year."

Country's largest lender State Bank of India is expecting personal loans to come out of the slow growth phase. "I believe that the taxation benefit will help the lower end customers to look at personal loans as an option," said CS Setty, chairman of SBI.

"This segment, definitely, will be out of the current slowdown that we have witnessed. It may not come (grow) to the 30-35% CAGR what we have had, but it will come to a reasonable level," he said at the bank's earnings presser earlier this month.

Despite this optimism, overall credit growth has moderated. According to the latest data, gross bank credit growth slowed to 11% in March 2025, down from the 14-16% range seen over the past two years. This deceleration is largely attributed to a slowdown in the personal loan and services segments, including unsecured loans and lending to non-banking financial companies (NBFCs).

RBI data reflects this shift, with personal loan growth slowing to 11.6% y-o-y in March 2025-down significantly from over 27% in March 2024. Credit card outstanding growth also eased to 10.6% from 25.6% a year earlier.

BAU Soon?
"In retail asset quality for unsecured products across the industry, including microfinance institutions (MFIs), a normalisation cycle is underway," Amitabh Chaudhry, MD & CEO of Axis Bank had said in the post earnings analyst call. "The main causes of earlier stress were credit overextension and overleverage. Our card portfolio has stabilised, but personal loans may take a few more quarters to show clear improvement."

The growth in unsecured personal loans had slowed after the central bank in November 2023 hiked risk-weights that made such loans expensive. In April, RBI governor Sanjay Malhotra had said that the risk weights were restored, not increased, about 18 months ago on unsecured advances to reflect a return to pre-Covid prudential norms.

Salary accounts
State-owned lenders are banking on salary accounts customers for the growth in this segment. SBI's Setty said that 6.5 lakh customers to its corporate salary package (CSP) were added last financial year, giving the bank a fresh pipeline.