While there may not be a one-to-one correlation between higher unsecured loans and higher NPAs, there is no doubt that as a category, these are high-risk assets and more prone to defaults. According to a banking analyst at First Global, there is higher probability of a default in an economic downturn, and a lower probability of recovery if the loan becomes a NPA.
The unsecured loan portfolio of many public sector banks has already started bleeding, with net non-performing assets (NPA) increasing by Rs 6,000 crore in the last two years compared with a decline of Rs 2,950 crore in 2005-06.
The private sector banks, which are more liberal in providing unsecured loans, have been creating more NPAs than their public sector counterparts. The 14 private banks added net NPAs of Rs 2,600 crore, while 27 public sector banks witnessed a Rs 3,260 crore increase in net NPAs in two years.
