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Abhinav Singh
Abhinav Singh


Getting personal


More and more Indians are now opting for personal loans for a variety of reasons. What to look for before you take the plunge

The personal loan market in India continues to be vibrant for the second consecutive year, thanks to aggressive campaigning by top lending banks and increasing awareness among the borrowers. A look at the Reserve Bank of India data reveals that the market grew by 16.6 per cent in 2014-15, compared to 14.8 per cent the year before. That is impressive, considering the lasting aftershocks of the global financial meltdown of 2008.

It took a while for the lenders to recover from bad loans in the retail assets portfolio, especially in credit card and personal loan sectors, but it seems they have finally found their feet. And with the recent cut in prime lending rates, the situation will only get better. Lenders are expecting a surge in demand with the festive season round the corner. “Both banks and non-banking finance companies would be expecting a share in this pie, especially when the macro is looking good with low inflation, lower interest rates and higher customer confidence,” said Pralay Mondal, senior group president, retail and business banking, Yes Bank. “Wage inflation has been stable and since banks now have a reasonably good quality unsecured loan portfolio we would expect them to be more aggressive in the personal loan business this festive season.”

Thanks to easy access to a person's credit history, banks have increasingly started focusing on unsecured business, which includes personal loans. “Since yield in this business is higher, credit cost adjusted return is good in well underwritten portfolio,” said Mondal. “We have seen a gradual but cautious growth in this portfolio and banks are focusing more on their internal customers where they have better transaction history.”

Of late, India's largest lenders like SBI and ICICI Bank are looking more at unsecured lending and have been pursuing the personal loan portfolio aggressively. The customers, on the other hand, are not only taking personal loan for emergency (nearly 37 per cent of personal loans fall in this category) but also for repaying borrowed money (10 per cent), buying household appliances (16 per cent), holiday travel (5 per cent), marriages and functions (17 per cent) and down payment of a home loan (15 per cent).

“With the RBI reducing rates to 50 basis points, increase in the demand for personal loan is expected. Now it depends on how quickly and how much banks transfer these benefits to consumers,” said Adhil Shetty, CEO, “Home loan rates are usually floating and hence existing customers will also get the benefits, but personal loan has fixed interest rate so customers will wait for the banks to announce the final rate reductions as it may only be applicable for the new customers.”

Experts said that since personal loans generally come at a high interest rate, people should bargain for better rates. Another piece of advice is to make use of promotional offers lenders make from time to time. Usually, banks announce offers during festive season for a limited time period. Also, one can use one's credit score as a bargain tool.

“Each bank has its own credit score yardstick for loan approval. On an average, a credit score of 700 plus is considered safe by banks,” said Shetty. “To use your credit score as a bargaining tool, ensure that your credit score is anywhere between 750 and 900. Moreover, a good repayment track record can be helpful. Small mistakes, like a bounced cheque, can bring down a good credit score. One can also opt for banks instead of NBFCs as they are more likely to offer you a discounted rate. Don’t just concentrate on an offer of a higher loan amount or a quicker disbursal, as banks disburse loans just as quickly as any NBFC. Both banks and NBFCs offer loans at competitive rates, but when comparing on a whole, banks have better deals on personal loans, especially if you have a salary account or a fixed deposit with them.”

Most banks in India focus on their internal customers. In order to secure a personal loan, a customer needs to have a credible transaction history with the bank and a good credit score with the credit bureau. Also, one's cash flow or salary should give comfort to the bank.

* Never borrow more than you need. Remember, you have to return the amount with interest.
* Pay it off quickly. If you have a little extra money in hand, use it to pay off your loan. Most banks do not charge a prepayment penalty these days. Choose your bank accordingly.
* Make sure that the EMIs do not disrupt your normal lifestyle. A balanced tenure is always a good idea.
* Make productive use of the money you borrow. Use the funds wisely and not on whims. Money put to good use will act as ‘positive motivation’ during repayment.
* Always ensure that all your outstanding dues are cleared before you request for a foreclosure. Banks have independent foreclosure policy and charges.

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Topics : #economy

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