The recent data and insights from management commentaries across NBFCs and banks highlight a concerning trend: a rise in delinquencies, particularly in unsecured loans, notably small ticket personal loans (STPL) valued at less than Rs 50,000, and loans facilitated through FinTech partnerships, according to a report by foreign brokerage Nomura.
Despite small ticket personal loans contributing about 25% of the incremental origination volume in the past two years, their value accounted for only 2.5% of the overall system personal loans. However, in the June 2023 quarter, over 50% of borrowers taking small ticket personal loans already possessed more than four credit products, indicating a potential risk factor.
While the increase in delinquencies within this segment may not significantly impact the system level, it could adversely affect mid/small-sized NBFCs that have experienced rapid growth in this sector, carrying substantial exposure to unsecured loans.
Rising delinquencies are anticipated to negatively impact NBFCs' loan growth, especially considering that around 25-30% of incremental loan growth for NBFCs between FY22 and 2Q24 stemmed from unsecured loans. This scenario could potentially lead to higher credit costs in FY25, offsetting the anticipated positive effects of repo rate cuts on funding costs.
Despite this, NBFCs have continued to outpace system/banks in unsecured loan growth, driven by fierce competition in secured segments. Over the period from FY22 to Q2 '24, NBFCs witnessed a 75% growth in unsecured loans compared to the overall system's 45% growth.
The collective Assets Under Management (AUM) of 13 NBFCs exhibited a 24% year-on-year growth in Q2 '24, with the personal loan portfolio expanding at a faster rate of 51% year-on-year during the same period, reflecting the sector's continued aggressive growth trajectory.
(With Agency Inputs)
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