Navigating Challenges in Unsecured Loans: A Deep Dive into Small-Ticket Personal Loans

In recent times, a discernible uptick in delinquencies within the realm of unsecured loans, particularly small-ticket personal loans (STPL), has set off alarm bells for lenders in India. This concerning trend can be attributed to a confluence of factors that are reshaping the landscape of personal lending.

1. Economic Slowdown Takes its Toll:
The ongoing economic slowdown has cast a shadow on the financial stability of borrowers, rendering them less capable of meeting their loan obligations. This economic downturn has become a significant contributor to the surge in delinquencies.

2. The Pitfalls of Easy Credit Access:
The proliferation of easy credit, facilitated by digital lending platforms, has ushered in a wave of borrowing. Unfortunately, this accessibility often occurs without a thorough assessment of borrowers’ repayment capacity, exacerbating the challenge of loan recovery.

3. Shifting Demographics and Borrower Profiles:
The spike in small-ticket personal loans is primarily fueled by borrowers in semi-urban and rural areas. This demographic shift introduces borrowers with less experience in managing debt, making them more susceptible to financial shocks and defaults.

4. Juggling Multiple Credit Products:
A notable trend is the increasing propensity of borrowers to juggle multiple credit products simultaneously. This practice amplifies their overall debt burden, creating a complex scenario that makes it arduous for them to navigate and manage repayments effectively.

According to a report from foreign brokerage Nomura, insights from data and management commentaries within Non-Banking Financial Companies (NBFCs) and banks indicate an increasing trend of delinquencies in unsecured loans, particularly in small-ticket personal loans (STPL) valued at less than Rs 50,000. The report also highlights that loans acquired through FinTech partnerships are contributing to this rise in delinquencies.

Impact on NBFCs and the Financial Landscape:
These rising delinquencies, especially in the STPL segment, are poised to adversely affect mid/small-sized NBFCs that have witnessed significant growth in unsecured loans over the last few years. Approximately 25-30% of NBFCs’ incremental loan growth from FY22 to Q2 ’24 originated from unsecured loans, exposing them to potential risks.

Moreover, if the stress in unsecured loans persists, the credit cost trajectory for NBFCs in FY25 is anticipated to surpass historical trends. This could potentially offset the anticipated positive impact of repo rate cuts on the cost of funds, posing challenges to sustained growth.

In the second quarter of 2024, NBFCs continued to outpace system/bank growth in unsecured loans, with a notable 75% increase compared to the overall system’s 45% growth. The total Assets Under Management (AUM) of these 13 NBFCs witnessed a robust 24% year-on-year growth in Q2 ’24, with the personal loan portfolio expanding at an even faster pace of 51%.

Conclusion:
As the financial landscape grapples with the complexities of rising delinquencies in unsecured loans, particularly in the small-ticket personal loan segment, it becomes imperative for lenders and financial institutions to recalibrate their strategies. A nuanced approach to risk assessment, coupled with prudent lending practices, will be instrumental in steering the sector toward sustainable growth while mitigating potential pitfalls.

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