Fulfill pre-conditions to take Personal loans

To get a personal loan one has to fulfill pre-conditions such as a professional degree, a salary account or being an existing customer. Earlier personal loans were classified as unsecured loans but now this concept has changed and now these loans are linked to an existing relationship with a bank. Generally banks for sanction of these loans, ask for a salary account and the loan is linked to the monthly salary which show the cash flow of the borrower.

Private Banks have now started focusing on the salaried class or in-house customers similar to the public sector banks, to upsurge their unsecured loan portfolios. Before this private banks used to sanction these loans did not ask for collaterals in case the individual had a good credit history. Borrowers’ salary slip was enough to get a loan. But now banks are checking the customers’ financial status, work experience and about the company where the borrower is employed. According private bankers, “A customer could take a loan on the strength of a good credit history and use it to have multiple loans from various banks. These kinds of loans are getting weeded out”.

After the tightening of norms, the private banks such as ICICI Bank, HDFC Bank and Kotak Mahindra reduced their lending rates to about 15-18 per cent. The industry sources informed some of the banks used to charge 25 per cent or more on such loans before the tightening of norms. The interest rate varied for different customers.

Kamlesh Rao, executive vice-president of Kotak Mahindra Bank pointed out, “Because of rising defaults, private banks are going slow on granting unsecured loans, particularly those based on credit history. All of them have become extremely cautious.” “These loans are less than 2 per cent of our portfolio of unsecured loans.”

Kotak Mahindra Bank’s preferred customers for these loans are self-employed traders and salaried people who on average apply for loan size of Rs 7.5 lakh. The bank unsecured loan book amount to Rs 1,300 crore.

Bank’s loan division informed earlier Citibank used to be liberal in sanctioning unsecured loans, now the bank has put pre-conditions such as professional degree, preferably an MBA, engineering degree, or be a chartered accountant, according to the bank’s loan division. In case the borrower has an account or credit card with the bank, then bank give preference to these borrowers.

On the other hand it is not mandatory to have a salary account for HDFC Bank, but in-house customers are preferred. The bank charges high pre-payment penalty of 4 per cent on outstanding loan. Till last year ICICI Bank was the one to sanction maximum number of personal loans, has now stopped giving small-ticket unsecured loans. By the end of the first quarter bank unsecured loan book amounted to Rs 768 crore. At present bank is busy in rebalancing its funding profile before it starts working on building its growth.

The public sector banks on the other hand are expanding their personal loans portfolios aggressively by giving loans to only those customers having salary accounts with them. The public sector banks are following the cash flow-based model in which the salary is attached to the loan account and the due payment is deducted directly from the salary account every month.

The State Bank of India country’s largest lender is offering loans at 12.5-15.5 per cent to the borrowers who have salary accounts with the bank. An official of the bank told, “Our delinquency rates are very low as we base it on this model.”

SBI is having a personal loan portfolio of Rs 37,538 crore after a 16 per cent growth since last year. Bank is focusing on existing customers and the well off segment.