Here’s Why Banks are Offering Personal Loans at Competitive Interest Rates

Updated on: 19 Jan 2024 // 4 min read // Personal Loans
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In the ordinary course, Personal Loans are expensive loans having the highest rates of interest among all other loan products. Personal Loan rates hover around the 10.99% to 20% mark in the market. The reasons for high rates are as follows:

  • Considered the riskiest of all loans
  • No backing of collateral
  • No need to justify the end use of funds

However, of late, banks are adopting a lenient view and have come up with various attractive Personal Loan options that include competitive interest rate pricing. Let us explore the reasons why banks are ready to offer Personal Loans at competitive rates today.

a) Higher demand for Personal Loans

The average disposable income in the hands of the Indian borrower is increasing over the years. There is a lot of awareness amongst the retail borrowers of the need to maintain an excellent credit rating. You have a higher proportion of double-income families today. Hence, the individual has a higher repayment capacity and therefore becomes eligible for applying for Personal Loans online or offline. This increase in the demand has forced the banks and the NBFCs (Non-Banking Financial Companies) to come up with exciting Personal Loan offers.

Banks have also simplified the procedure for approving Personal Loans. You have the facility of submitting an Online Personal Loan Application. The processing of these loans does not take much time because the eligibility norms are straightforward.

  • You need a decent source of continuous income
  • Good repayment capacity is necessary
  • The borrower should have an excellent credit score in the range of 700 and above.

If the applicant satisfies these conditions, the banks are quick to approve Personal Loans. The documentation part is elementary,and you receive the funds in your account within 72 hours. It makes it the easiest available credit in the financial sector.

b) The decline in the quality of corporate lending

Until very recently, banks used to prefer corporate lending over other types of lending like industrial, agricultural, and retail. The reasons are obvious. One big credit facility can boost the statistics of the bank within no time. The same bank would have to lend to thousands of retail borrowers to match the statistic. However, the occurrence of the scams like the PNB-Nirav Modi Group and others has made banks rethink their portfolio. One such fraud leads to the ballooning of NPAs beyond the control of the banks.

The Reserve Bank of India has stipulated strict measure by restricting many banks from increasing their corporate exposure. This situation has forced the banks to turn to the retail sector to boost their advances portfolio. The Personal Loans, being one of the most significant retail loan products, have thus gained in prominence. The competition among the banks has benefited the retail customer as each bank is trying to entice the customer into their fold.

c) Change in the perception of the banks

The unearthing of such massive scams has led to a complete overhaul in the banks’ perception of risk-based assets. The banks have realised that the NPAs (Non-Performing Assets) in the corporate sector far outnumber the NPAs in the retail industry thereby making corporate finance a riskier proposition as compared to retail banking. Statistics show that the proportion of retail loan NPAs is around 2%, much less than the industrial and services sector that is at 20% and 5% respectively.

The introduction of the MCLR (marginal cost of funds based lending rate) prompts the banks to go for less risky loans in their portfolio. As of today, the retail sector is the least risky of all investments. It explains why banks are competing with each other in attracting customers to avail Personal Loans. The easiest way is to offer competitive rates of interest.

d) Digitalisation and automation makes it easy

Processing a loan application, opening an account, and monitoring it has become easy because of digitalisation and automation of bank services. It becomes easy for the banks to follow up on loan defaults as the system allows detecting them quickly.

Banks are now exploring innovative methods like Artificial Intelligence to gauge customer preferences. The younger generation prefers to go for Personal Loans and Credit Cards more when compared to the earlier ones. The banks are also adopting the right approach of moving with the times. The Personal Loans are the flavour of the industry today. Hence, you find the banks marketing their Personal Loan products aggressively.

The increased awareness in the younger generation of the need to maintain a good credit reputation has also fuelled the Personal Loan market.

Also Read:  Common Concerns Regarding Online Personal Loan Applications

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