Fitch Ratings expects defaults in unsecured personal loans in India to increase

Personal loans are usually fixed rate loans, and are unsecured in nature. They do not carry any guarantee, collateral or guarantor. Given their unsecured nature, personal loans are not pleasant to the same recovery efforts that are seen in other asset classes.

Fitch Ratings said personal loan financing in India is very competitive business and this might have pushed many institutions to initiate loans in riskier segments.

According to Fitch Ratings defaults in unsecured personal loan sector in India will continue to increase. In its recently published report titled 'Indian Unsecured Personal Loan Transactions', Fitch has stated that the loan performance has continued to worsen in India since July 2007. In support to this, the rating agency had noted that delinquencies in the personal loan sector have been higher than those seen in other asset classes.

"Since then, loan and recent events have seen some lenders criticized for their recovery strategies, which in some cases may have led to other borrowers willfully becoming delinquent," Fitch said.

In response to the advertising of the engagement of recovery agents, the Reserve Bank issued draft guidelines to all scheduled commercial banks in its medium-term review of the annual policy for 2007-08 in November 2007.

In its report the rating agency stated that the immediate impact of rising delinquencies in unsecured consumer loans is on declining collection efficiencies in personal loan transactions mainly because banks are resorting to a softer recovery approach in the form of legal notices and increased phone calls.

In the long run, the regulator seems to make banks more accountable for their third-party recovery agents.