Aggressive banks spawn personal loan millstones

Vishal, 32, a software engineer from Bangalore, regrets the day he fell for an attractive personal loan scheme a few months back.
Rising interest rates have meant his equated monthly instalments (EMI) turned heavier, and now feels like a crippling millstone.

Who’s to blame for the predicament? Both Vishal and the bank.
While aggressive banks are pushing unsolicited offers, weak-willed customers, forgetting their wherewithal, are falling to greed.

According to the Reserve Bank of India’s monthly outstanding loan data for September, personal loans portfolio has grown 12.5% year-on-year to Rs118,328 crore. It’s pertinent to note that interest rates on these loans hover in the region of 15-20%, meaning customers have to pay over Rs20,000 crore in interest payments alone every year.

“Our customer base survey indicated that 70% of our clients availed of unsolicited loan offers from banks and financial institutions —  either directly or through sales agents,” said Ashwin Cannonkadu, founder and CEO of Debt Doctor, an agency that helps defaulters settle their outstandings amicably.
A few bankers DNA spoke with chose to blame some private and foreign banks for the situation.

Banks also have the tendency of pushing these loans more to their existing customers. “Out of the unsolicited offers, 50% of the personal loans were offered by the cross-selling abilities of the banks and financial institutions based on their payment track record on other products,” said Cannonkadu.

Banks say this approach makes sense. “It is better to give loans to a customer who has got a good track record,” said R K Bansal, executive director, IDBI Bank.

Earlier in September, HDFC Bank had launched ‘Personal Loan Swift’, a product that processed personal loans in 24 hours flat. Such loans are unsecured and do not require much documentation.

But when it comes to recovery of these loans, bankers don’t seem worried.

“Recoveries in personal loans are pretty decent. We also have the added benefit of a credit bureau that is fully functional and hence, we make more informed choice about the customer,” said Sumit Bali, executive vice president (retail assets), Kotak Mahindra Bank.
According to Bali, if the credit is okay and if the customer is going through bad times, then through legal means they recover the monies. “Our recovery from personal loans is higher than 90%,” he said.