PSU Banks will focus on personal loans to increase margins and profitability

To increase interest rate margins and profitability public sector banks are offering personal loans to the people. Among the loans segment personal loans yield more returns.

Banks like Allahabad Bank, UCO Bank, Union Bank of India and United Bank of India have already worked out new strategies to sell their high-yielding personal loan products to their retail customers. Earlier during economic slowdown many of these banks have stopped offering personal loan products as number of defaults have increased at that time.

On an average, these banks have lower average of retail loan share in comparison to the industry. The retail loans outstanding loans average is around 12-14% in comparison to industry average of 20-22%.

Allahabad Bank chairman and managing director JP Dua said, “Personal loan gives a better spread as well as it helps in building relationship.” In the next three years bank will be improving its retail loan shares to 22%.

Allahabad bank’s retail loan average is at 13.92% whereas Union Bank ratio is at 11.5%. State Bank of India countries largest lender has the ratio around 21%.

Public sector banks earn maximum return of around 14-15% from off-shelf loan products in personal loan category whereas from car loans they earn a return of around 12%. On the other hand housing loans get a secured and a higher volume of business, but the returns are much less than the other loan categories.

Banks prefer salaried customers for off-the-shelf products as they link such products to the salary accounts of the customers to minimize probability of default.

According to United Bank of India chief Bhaskar Sen with the improvement in economic conditions the purchasing power of middle class families is also increasing therefore this can boost demand for car loan and housing loan products. Mr Sen said, “The housing segment will continue to give banks businesses many more years. In the car loan segment, demand is seen especially in the small car category.”

UCO Bank chairman and managing director SK Goel said: “We have identified 200 branches across the country to push retail loan products as our share of retail loan business is comparatively low.”

United Bank has 12% of retail share whereas UCO Bank retail share is around 14%. Among the public sector banks, Bank of Baroda has a better retail loan ratio at 20% followed by Indian Bank at 18%.

Bank of Baroda executive director RK Bakshi said, “A higher share of retail loan is important for credit diversification. It’s a stable business and it improves relationship with customers.”

Mr Dua of Allahabad Bank said that public sector banks have large number of branches therefore they can easily improve their retail loan base through their network. “We will try to leverage our vast branch network. We plan to expand our current and savings account deposit base to reduce the cost of deposit and a focus of retail loan will accompany this drive,” Mr Dua said.