Unsecured loans are easier to secure, but...

Banks have been given greater freedom to give unsecured loans, but they would need to make higher provisions once such loans turn sticky. In the latest credit policy, the RBI has relaxed the cap on unsecured loans, whereby the board of each bank can decide on the cap. However, provisioning has been increased from 10% to 20% if the unsecured exposure becomes substandard.
Banks had been lobbying the RBI to remove the 15% cap on unsecured loans, which has been in existence for the last 37 years. The current RBI norm stipulates that a bank’s portfolio of unsecured loans plus 20% of unsecured guarantees should not exceed 15% of it’s total advances. The RBI has now relaxed this 15% ceiling.
The cap made it difficult for banks to give short-term loans to corporates without pledging any assets, thereby missing possible business opportunities. For corporates, the latest move means it can approach a single bank or fewer banks for taking unsecured loans. “This will enable us to lend to good corporates who need immediate loans but are unable to provide security up-front,� said K Cherian Verghese, chairman of the Corporation Bank.
The RBI has said that the higher provisioning is aimed at covering losses on unsecured exposures. “It will serve as a cushion for banks against any adverse development,� said P S Shenoy, chairman of Bank of Baroda.
Banks have to classify a loan as a bad debt if the borrower fails to pay either interest or principal for more than 90 days after the due date. These bad debts are treated as non-performing assets and banks have to take a hit on their earnings to provide for them.
“The move reflects the liberalised approach of the Central bank in the credit delivery system,� said P K Choudhury, managing director at Icra. “But the bank board will have to be cautious in setting up such exposure limits,� he added.
The move would also give a boost to the fee-based business of banks, wherein they provide guarantees on corporate borrowings. Moreover, smaller banks will also gain from this move as their portfolio of total advances is much lower.