Unsecured Loans

An Insight into Unsecured Loan market in India

In the financial year 2015 and 2018 personal loans, small and medium enterprises and credit loans under the unsecured loan market reached a compound annual growth rate of 27%. This phenomenal growth rate was almost four times the growth in bank credit. It came to pass at a time when banks were struggling with corporate loans that went bad. As per CRISIL (Credit Rating Information Services of India Limited) research the total unsecured loan may reach a 24 to 25% compound annual growth rate by the financial year 2021 owing to higher credit penetration in extant markets and due to increased emphasis of lenders on smaller cities.

Forms of Unsecured Loans in the Unsecured Loan Market in India

• Signature loans

This is the simplest of all unsecured loans as it can be sanctioned on the basis of your signature only. Your signature would be deemed as an assurance for repayment of this loan where you promise your lender to repay the loan in time. This loan can be acquired from a bank or an NBFC (Non-Banking Financial Company). A signature loan shall be paid in installments on a monthly basis until the loan is fully paid.

• Personal Loan

This form of a loan is the common of all loans as one doesn’t need to state the reason for availing this loan. This loan can also be paid in installments over a fixed tenure. This loan can be acquired from a bank or an NBFC (Non-Banking Financial Company) either offline or online.

• Education Loan

It is very easy to understand that this loan is used to fund education courses. It is also referred to as a student loan. It has the moratorium feature where a borrower doesn’t require paying anything for a period of time. It also offers interest rate subsidy and flexible repayment modes.

• Peer to Peer Loans

This is a form of loan which can be borrowed by an individual or your peers and not from banks or NBFCs. It has a fixed interest rate. It is maybe an easy form of obtaining loans but it is quite risky as compared to loans from banks.

Features and Benefits of the Unsecured Loan Market

• Unsecured loan market provides various benefits to customers.
• Unsecured loan market is usually having an easier and convenient application process. The customers do not require visiting the branch of the lending bank at regular intervals in order to avail the unsecured loan. It is available on online platforms hence making it easy to avail.
• Banks provide quicker and swift turnaround time on unsecured loan applications. It helps unsecured loans in evolving as a vital financial tool in case of an emergency monetary situation.
• The borrowers don’t require to provide any collateral for availing the unsecured loan therefore these loans are offered at a high rate of interest in comparison to other loans.
• Non-requirement of collateral as security to the lending bank makes the unsecured loan popular among the customers.
• The rate of loan amount that the banks offer as an unsecured loan depends upon the income of the applicant. It implies that the customer can apply for unsecured loans in proportion to their income.
• One of the essential features of this type of loan is that it requires a minimum documentation process. As the process has gone online the entire procedure has become paperless.

Factors leading to growth in the unsecured loan market in India

The growth in the unsecured loan market is owing to multiple factors as discussed below.

• Increase in discretionary spending by Indian consumers as seen in the growth of private final consumption expenditure with a compound annual growth rate of 11% in the last few years and an increase in tourists in India.
• Increased access to data with credit bureaus as seen in a rise in the number of records in the database of the credit bureau.
• Faster internal processes with the advancement of technology have resulted in minimizing the turnaround time from 15 days to three days for SME (Small and Medium Enterprises) loans. In the case of unsecured retail loans many have preapproved loan offers that are ready for disbursal.
• Minimized rates in selected segments like personal loans for salaried customers, corporate salaried employees have led to an increase in off-take.
• Deployment of POS terminals and growth in such other infrastructure and growth of organized retail which has led to an increase in credit card usage aided the growth of the unsecured loan market in India.
• Repressed property prices and limited availability of collateral and facilitation of loan availability have led to an increase in demand for unsecured SME loans.

Difference between Unsecured and Secured Loans- Unsecured Loan Market

The basic difference between secured and unsecured loans is provided in the table made below.

Aspects	Secured loans	Unsecured loans
Collateral	Collateral is required during the application process in this form of loan.	Customers don’t need to give any collateral for availing loans under this category.
Consequences of loan default	In case of default the borrower may lose his assets.	In case of default the borrower doesn’t have any risk of losing his assets as no collateral is provided.
Parameter of Risk	The default risk is lower in this form of loans.	It has a higher rate of risk of default as no collateral is provided.
Rate of interest	As the risk is less, therefore, the rate of interest is lower for loans.	As the risk factor is higher in this form of loans therefore the rate of interest is on the higher side.
Tenure of loan	It has slightly longer tenure.	It has a short tenure.

Conclusion

Despite the relatively slow progress of the Indian economy in the last few years the unsecured loan market in India has seen good growth. It may be linked to consumers change in mindset where they are looking for smaller ticket loans.