The spectre of rising defaults in unsecured loans has once again come back to haunt banks and non-banking financial companies (NBFCs). Private sector lenders ICICI Bank, Axis Bank, Yes Bank, Kotak Mahindra Bank and Bajaj Finance have reported an uptick in defaults in unsecured loans. Worse still, some lenders are seeing one-third of new retail slippages originating from the unsecured portfolio.
The turn in the cycle is not good news for lenders whose non-performing assets had dropped to a multi-year low of 2.8% at the end of March.
Slippages refers to the portion of standard loans that deteriorate in quality and become non-performing assets (NPAs). Facing mounting pressure, lenders have begun to temper the growth of personal loans.
“We have also seen an increase in delinquencies and NPL (non-performing loans) formation in unsecured loans over the last three to four quarters, both in credit cards and in personal loans,” said Sandeep Bakhshi, managing director and CEO, ICICI Bank, in the earnings call.
ICICI Bank’s unsecured loan portfolio, which primarily comprises personal loans and credit cards, is about 14% of the total loan portfolio. However, the bank has significantly slowed down its personal loan book. On a year-on-year basis, the growth has declined from 40% in the September quarter of the previous year to approximately 17% in the current year.
Yes Bank has seen over one-third of fresh retail slippages coming from the unsecured portfolio during the second quarter of the current financial year.
“Of total fresh retail additions in this quarter, 35-40 % came from the unsecured portfolio,” said Prashant Kumar, managing director and chief executive officer, in the earnings call.
The private lender reported Rs 1,179 crore of fresh retail slippages for Q2FY25.
In case of Kotak Mahindra Bank, around 30%-35% of its slippages came from the credit card business. Fresh slippages rose to Rs 1,875 crore in the second quarter of the current fiscal, from Rs 1,314 crore in the year-ago period. “We are seeing some worsening of the asset quality in some of the unsecured and some other asset classes,” said Amitabh Chaudhry, MD and CEO, in the Q2cearnings call.
The rise in defaults in unsecured loans is due to hardening of interest over the last couple of years. Between May 2022 and February 2023, the RBI hiked repo rate by 250 basis points, which raised cost of funds for lenders and prompted them to increase lending rates.
According to bankers, individuals who have taken more than two personal loans have been hit hardly and are unable to pay EMIs of personal loans. “When we look at the portfolio movement across secured and unsecured portfolios, one thing I think jumps out in general is that those clients who have more than three live unsecured loans are showing higher propensity to default,” said Rajeev Jain, managing director, Bajaj Finance. in the earnings call, adding that the company is tightening underwriting norms for such cohorts of customers across all their products.
This increase in defaults follows the Reserve Bank of India’s warning to banks to be more cautious in unsecured lending practices.
RBI governor Shaktikanta Das has also expressed concerns about the unbridled growth in personal loans and asked lenders to go slow on such advances. Banks, especially private lenders, had been growing personal loan books by 40-60% in the past one year.
After the RBI’s nudge, the growth in personal loans has begun to moderate. Personal loans in the banking sector, which were growing by 30% in the first half of 2023, are now growing by around 14%. As per RBI data, personal loans by banks grew 13.9% to Rs 55.6 lakh crore at the end of August this year.
Worried about the sharp rise in personal loans, the RBI had decided to increase risk weights on secured loans in November last year when it directed banks and non-banking financial companies to reserve more capital for risk weights. The mandatory risk weight requirement was increased by 25 percentage points and is applicable to unsecured personal loans, credit cards and lending to NBFCs.
The move was aimed at slowing the pace of unsecured loans by increasing cost of funds for lenders. Under personal loans, banks sell unsecured loans such as credit cards, consumer loans, microfinance and other small ticket loans not backed by any collateral.