Kotak Mahindra Bank reviewed its unsecured lending strategy after the Reserve Bank of India recently geared up to curb the rampant growth in unsecured loans in the system, said Virat Diwanji, group president and head of consumer banking.
“When the regulator raised a word of caution (on unsecured loans), we went and relooked at our algorithms and corrected as required,” Diwanji said in an interview with Moneycontrol on February 27.
The RBI recently increased the risk weights on consumer loans to discourage rampant lending by both banks and non-bank financiers. “Look, the corrective steps taken are more about selecting the customer. We would be more careful in lending to new-to-credit customer. Secondly, we will go slow on giving top-ups," he said.
Giving an example, Diwanji said that if a customer had taken a loan of Rs 50,000 repayable in two years and if paid till nine months, earlier the bank used to go back to the customer and ask if he wants to replenish it back to the same level.
“Now, instead of the nine months, I will take it to 12-15 months. And even after that, if earlier I was giving you 100 percent of what you have paid. Now I shall restrict it to, say, 50 percent of what you have paid. So, those are the kinds of corrections that you do after the word of caution which came in.”
Asset quality good
Diwanji said that the bank’s asset quality is good so far on consumer loans, but added that there could be stress going ahead, based on the industry trends.
“Our portfolio is behaving well. That's good so far. But having said that, if this industry is likely to go through the pain, then you will obviously feel some pain,” he said. “And, for that, you have to keep a very close watch on what I call as from cradle to grave (look for any early sign of trouble and take corrective action before it becomes default).”
What worries RBI?
The RBI action could have emerged from concerns of fast-paced growth in unsecured loans in an high interest rate scenario and growth in small-ticket loans by lending apps, according to him.
“The RBI’s worry on the unsecured loan portfolio stems from the fact that, generally as the interest rates start rising, the unsecured portfolio becomes vulnerable to default and growth rate starts tapering down. However, we have seen that in last 15 months, in spite of the repo rate going up, the growth of unsecured business have continued,” Diwanji said.
Second, a deep dive into loan ticket sizes revealed that low-ticket unsecured lending (ticket size of around Rs 15,000 to Rs 25,000) was fuelling this growth. “At the same time, there's a plethora of app-based lending options coming from fintechs.”
Noting that the cost of collection for such a small-ticket loan is higher, he said the cost of recovering one EMI could be equal to the profit that you make on the unsecured loan.
“Because, as you know, I've given you a 10,000-rupee loan to be repaid in 12 months. The profit for this lending is in the last two-three installments. So, if you have paid nine or 10 installments and don't pay the 11th and the 12th tranches, then the lender has lost the income.”
Not in small-ticket loan lending
Calrifying that Kotak Mahindra Bank is not in the business of low-ticket size lending, Diwanji said majority of the loans are given to the existing customers which allows the bank to take more informed decision in addition to the credit bureau data.
“We always look at ensuring we achieve our risk-adjusted returns on lending. These operating philosophies have helped us build our unsecured portfolio over the last couple of years. We will continue on our strategy to maintain the overall share of unsecured business in mid-teens,” Diwanji said.
Growth targets
Diwanji said the bank plans to grow the share of unsecured loans to around 15 percent of the total loan book from 10.7 percent over the next few years. “We will stick to our original statement. We are okay to move up to mid-teens. So that strategy does not change in terms of unsecured lending.”
He added that with increase in risk weights there has been some minor increase in the lending rates of 15-25 bps.
Diwanji said the bank is bullish on digital lending, considering the lower cost on customer acquisition and ease of business. “Digital is the way to go and if we get to acquire a customer at a one tenth of the cost in the physical world, we will continue to do that. Acquiring customer in the digital world is the easiest thing to do. Obviously, the business done digitally will continue to grow,” he said.
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