Gone are the days when loans were extended only against a collateral. Banks are increasingly providing loans without demanding a security and due to this the unsecured loans category of most public sector banks have witnessed increased growth in the financial year 08.

The unsecured loans portfolio for the public sector banks recorded a growth 40.9% for the financial year 08 where as their private peers grew only at a rate of 39.7% for the same period.

Unsecured loan is basically a type of loan that does not require the borrower to provide the lender with collateral. Typically, these loans carry higher interest rates and often require a co-signer. They mainly comprise of personal loan that is considered to be riskier than the secured loans - loans which are provided against collateral. This category of loans includes small-ticket education loans, credit card receivables, loans against salaries and consumer durable loans. Sometimes small portions of corporate loans such as overdraft and discounting of bill also come under the unsecured loans category.

With a view to get rid of the conservative image, most small banks are increasing their unsecured loans portfolio. This point was noticed in the growth rate of banks like Allahabad Bank, Central Bank of India, Indian Overseas Bank, Karur Vysya Bank and Catholic Syrian Bank where the unsecured loan portfolio more than doubled by 140%, 104%, 106%, 101% and 144% respectively. Even private leaders like ICICI Bank and HDFC Bank recorded a steady growth of 31% and 40% respectively in their unsecured loan portfolios.

The banking sector all together extended unsecured loans worth Rs 5,72,160 crore in financial year 08 as compared to Rs 4,04,067 crore in financial year 07, a growth of 41.6%.

However these loans are provided by the bank at higher interest rate as compared to other loans that are linked to the benchmark prime lending rate of the bank. This is because these loans carry higher risk weights as they are not backed by a collateral or even a guarantee.

The growth in unsecured loans is not bad for a lender as there are higher returns on them, says an industry expert. But at the current scenario banks may face a trouble as there are higher expectations of defaults due to slowdown which are most likely to be accounted under the unsecured loans category. Therefore banks need to be extra careful with these loans since they would not be in a state to recover the amount once the borrower fails to repay the loan.