Major banks have said that there is stress in the unsecured loans space. This space is driven largely by fintechs’ disbursement of small-ticket personal loans, those under Rs 50,000. Unsecured loans do not need any collateral, furthering access to easy credit.
There is also an expectation that the regulators may make it tougher for banks to lend to this ‘riskier’ segment.
Axis Bank in its post-earnings media call in October said it saw higher delinquency in sub-Rs 50,000 personal loan segment, which is clouding the assessment of the unsecured business. The bank has stayed away from this segment.
SBI Chairman Dinesh Khara said that the bank does not extend loans below Rs 50,000.
Bank of Baroda has chosen to reduce the rapid expansion of unsecured personal loans. These loans have been rising 60-70 per cent due to their small starting point, but now the growth will be limited to around 35%. This decision comes in response to concerns that have been raised across different platforms, a TOI report said.UBS Securities in a note warned of ‘increasing default risks in retail unsecured loans of banks, which is likely to push up their credit losses by 50-200 bps.”
The rise and rise of small-ticket loans
India’s consumption this last year has been buoyed by a vast section of the middle class opting to spend on non-essentials on credit.
Fintech lenders disbursed loans of around Rs 30,000 crore in the June quarter, up 32% year-on-year, according to the Fintech Association for Consumer Empowerment’s report.
This rise in appetite for credit has caught the attention of the Reserve Bank of India, which warned bankers about their ballooning unsecured retail loans. “Strengthen your internal surveillance mechanisms so that any risks that may likely be building up are handled upfront, rather than coming to grief at a later time,” RBI Governor Shaktikanta Das said.
RBI’s warning came amid a rise in appetite for small-ticket loans. A fourth of the overall retail loan originations by volume between January 2022 and June 2023 have been small ticket personal loans of less than Rs 50,000, credit information bureau TransUnion Cibil said recently.
From a delinquency perspective, there was an uptick in the small ticket personal loans of less than Rs 50,000 that were unpaid for over 30 days during the first six months of a loan at 10.24 per cent in December 2022 as against 7.56 per cent in December 2019, the CIC report said.
“Even though delinquencies on small-ticket personal loans have a marginal impact on the personal loan portfolio, these need to be monitored closely, especially because consumers may prioritize other payment obligations ahead of personal loan payments, which in turn may be a wider indicator of financial stress,” it said.
RBI’s Das had even met the top management of upper-layer NBFCs, in which talks were held on the risks associated with high credit growth in the retail segment, mostly in the unsecured category.
“…the Governor advised that the NBFCs and HFCs need to remain alert to avoid any complacency during good times,” the RBI said.
Another report by TransUnion CIBIL showed that consumption-led, unsecured retail loans have grown at a CAGR of 47 per cent from the quarter ending March 2021 to March 2023.
Worries could mount for regulators given the expectations of increased borrowing during the festive season. Overall disbursals for digital lending platforms increased by an average of 15-20 per cent during the festive period.
