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Informist, Tuesday, Oct. 1, 2024

NEW DELHI – Credit rating agencies have cautioned about the asset quality of Indian lenders' unsecured loan books, saying that early signs of stress were visible in this segment. In a round-up of ratings for the first half of 2024-25 (Apr-Mar) on Tuesday, all the four major Indian agencies called for close monitoring of the same by banks and non-banking financial companies.

"The credit quality of India Inc. remains steady, and in the past six months, there hasn't been an imperative to change the outlook on any sector," said K. Ravichandran, ICRA's chief rating officer. However, Ravichandran added there were some "emerging pockets of concern", including the growth in unsecured lending, "with early signs of rising delinquencies in unsecured retail and microfinance segments".

According to ICRA, the share of unsecured loans in the total retail book of NBFCs has jumped in recent years to 26% in July from 16% in March 2019. For banks, the share has been largely flat around 33-35%.

In November, the Reserve Bank of India acted to clamp down the rapid growth seen in some segments of personal loans. While the measures, which included an increase in risk weights on banks' personal and credit card loans and a double-whammy for NBFCs in the form of an increase in the risk weights on banks' exposures to them as well as risk weights for NBFCs' own unsecured loans, have brought down credit growth in these segments, analysts as well as the RBI continue to sound warnings.

As per latest data from RBI, growth in 'other personal loans'--which include unsecured loans--was down to 13.2% as of Aug. 23 from 23.7% last year and 14.5% as of Jul. 26. Similarly, credit card outstanding was 19.9% higher as of Aug. 23, down from 31.4% last year and 22.0% as on Jul. 26. However, loans against gold jewellery were up a massive 40.9%, twice the year-ago growth rate of 20.4% and higher than 39.0% recorded as of Jul. 26. On Monday, the RBI called on lenders to review their gold loan policies and processes after a review by the central bank revealed several irregularities. The central bank warned that non-compliance with its directions "will be viewed seriously and will attract, among other things, supervisory action".

According to Sanjay Agarwal, senior director at CareEdge Ratings, credit losses in the unsecured space are a "key monitorable". The sentiment was shared by CRISIL analysts, who said asset quality in the unsecured and microfinance category should be monitored on account of an increase in leverage of personal loan borrowers, loan waivers, and weather-related issues.

"Asset quality of microfinance loans is showing early signs of stress and, hence, credit costs are likely to increase. Lower ticket size segments of unsecured personal loans also bear watching given their higher growth and inherently vulnerable borrower segment," CRISIL said in a statement.

Arvind Rao, a senior director and head of India Ratings and Research's Credit Policy Group, agreed that while delinquencies could start rising for unsecured loans, it is unlikely to cause problems for companies rated by the agency.

"While we do foresee that there could be a moderation in growth for premium products, because of the monsoon rural consumption is expected to grow. And inflation is expected to be low. So, the cash flow for rural consumption is expected to be high. So lower credit availability through banking channels and NBFIs (NBFCs), we don't see that as a challenge for consumption growth," Rao said Tuesday.  End

Reported by Siddharth Upasani

Edited by Akul Nishant Akhoury

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