The central government has asked all the state owned banks to phase out all short term unsecured loans by January. The finance ministry has stated that collateral free loans are risky and create pressure on the banks' balance sheets.

One of the most common type of  unsecured loans are personal loans, which do not take any collateral and are generally for short duration of time for specefic reasons like purchasing an electronic good, personal use, wedding purpose,et al.

"All such loans shall either be phased out in the next six months time or collateral security will be created," said a ministry official to the PSB chiefs. The banks have also been directed to develop a framework for sanctioning of such loans.

The banks were further directed for 'board approval' of such loans. Further the ministry also asked the banks to report details of slippages of such loan accounts to it. Slippages means turning of a loan into a nonperforming asset (NPA).

Due to increasing pressure on banks' asset quality, the ministry had last month asked the banks to improve their sanctioning process for such loans. This directive is only for the unsecured loans of short durations.