Though, personal loans are expensive when compared to other set of loans such as car, gold or business low because of their unsecured nature, and banks and NBFC companies perceiving high risk in this asset class have kept the rate high, in the recent time frame the rates have rather turned competitive for a buyer. Here's why?
1. More takers of personal loan: Demand for personal loans that are usually offered at an interest rate in the range of 10.75% -22% is surging ever since 2014. And as per the RBI's data, of the total loan book, retail loans or in particular the non-food credit is increased from just 18% in March 2014 to almost a quarter now.
The rise in borrowing through the route has come in as this category of loan can be obtained in a hassle free way to meet any of the day to day shortfalls in finances just on the basis of income, creditworthiness and repayment capacity of the borrower and does not needs him or her to provide a collateral against the financed amount.
2. Corporate lending has been on the decline: In the wake of Nirav Modi like scam and given the reeling pressure due to ballooning NPAs, banks have been directed to be extra cautious on lending to corporates. In fact, Allahabad Bank has been asked to cut back its exposure to risky assets.
So, to offset the decline in corporate credit offtake, banks are offering retail or personal loans at competitive rates to not entirely loose on their credit portfolio.
3. Banks perception of these set of loans being less risky: On a relative basis, the loans extended to the retail class have yielded lesser NPAs at just 2% of the gross advances while the NPAs from the industry and services sector has stood at 20% and 5% respectively.
4. Digital transparency aids in better customer profile and credit worthiness realization and hence reduced credit risk: Artificial intelligence, data analytics, improved risk prediction model has also become the frontrunner of the banking industry and now to reduce the credit risk to the lowest possible, banks are ready to bear an extra cost here to reduce the risk assessment cost. To rule out credit risk, banks now aim to look upon all sources to extract customer's profile to reach a conclusion on their credibility from their shopping habit to various social media profiles.