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The real reason why banks are offering cheap personal loans

The real reason why banks are offering cheap personal loans

The real reason why banks are offering cheap personal loans
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By Aastha Agnihotri  Jun 6, 2018 1:05 PM IST (Published)

Every once in a while we get calls from bank executives offering “pre-approved” credit card or a personal loan at no additional cost. While most of us usually pay no heed to their "one-time" offer, the data from the Reserve Bank of India (RBI) showed that more people are taking retail loans this year.

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As per the RBI data, the non-food bank credit reached almost a quarter of its total loan book in March 2018. It was around 18% in March 2014 and has been on an uptrend since then.
So why is the retail loan portfolio gaining so much traction after all these years?
LOW RISK BUSINESS
"Retail loans have become a low risk segment for banks. While non-performing loans to industry and services form around 20% and 5% of the gross advances respectively, retail loans NPAs form just around 2% of the gross advances," Naveen Kukreja, chief executive officer and co-founder of Paisabazaar.com said over an email.
Coporate loan book has taken a hit in recent years, putting pressure on banks’ profits.
According to the RBI, the gross non-performing assets in Indian banks, specifically in public sector banks, are valued at around Rs 400,000 crore ($61.5 billion), which represents 90% of the total bad loans in India, with private sector banks accounting for the remainder.
This has resulted in reduced corporate lending in the last few years.
INCREASED TRANSPARENCY
In the last few years, increased availability of data due to rising digital footfalls have enabled banks to reduce their credit risk in retail loans.
Credit risk is the probable risk of loss resulting from a borrower's failure to repay a loan or meet contractual obligations.
"Through bureaus’ credit reports, data analytics and advanced risk prediction model, banks can easily analyse the past credit behavior of prospective borrowers and price their loans accordingly," added Kukreja.
Banks are hoping to slash risk-assessment costs and trigger a new wave of consumer lending with apps that look at everything from Facebook connections to online shopping habits to rate potential borrowers.
With corporate borrowing stuck in the doldrums, Indian banks are hoping to get more growth out of retail lending with these apps.
DIGITAL PUSH
More and more Indians are now accessing their bank accounts online and making internet transactions instead of visiting a bank branch. This has opened gateway for the Indian lenders to tap their prospective customers via cheap loans and credit card offerings.
"Banks’ collaboration with fintechs, increased adoption of digital channels and the government’s IndiaStack initiative have all led to increased access and faster processes for retail consumers," said Kukreja.
India Stack refers to the government's ambitious project of creating a unified software platform to bring India's population into the digital age.
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