Much of the deterioration in loan quality is likely to be the result of loan stacking, or the practice of the same borrower having multiple outstanding loans from different lenders.
Loan losses could shoot up by as much as three times in the unsecured retail space, hitting new-age fintech lenders the most, credit-scoring firm CreditVidya said in a report. Much of the deterioration in loan quality is likely to be the result of loan stacking, or the practice of the same borrower having multiple outstanding loans from different lenders.
Digital personal loans (PLs) and payday loans had been driving growth in fintech lending. The number of loans originated as per records with CreditVidya shot up to 9.4 million in Q4FY20 from 3.1 million in Q2FY19. Digital PL penetration has increased to 3x (3 times) in value over the past seven quarters and payday loan penetration has increased by 11x over the same period, the report said.
“The frequency of customers stacking loans has increased significantly over the last two quarters, mostly driven by payday loans,” CreditVidya said, adding that customers who are prone to this practice pose a significantly higher risk than others.
Much of this growth could soon come back to bite lenders. Mass-market customers, who have an average loan outstanding of Rs 25,000 and an average equated monthly instalment (EMI) of Rs 3,500, are most at risk. They have seen a sharp drop in incomes and are, therefore, unlikely to be able to fulfil EMI obligations beyond two months, CreditVidya said. Fintechs and new-age non-banking financial companies (NBFCs) account for 50% of the loan exposure to this segment. Another 40% is owed to NBFCs and small finance banks (SFBs), while the rest of the exposure is held by banks.
The mass-market segment, which includes migrant workers badly hit by the lockdown, could see delinquency rates double as the borrowers return to their hometowns and some jobs are permanently lost. Non-performing assets (NPAs) could treble. “Unlikely that consumers will let go of their savings to fulfil EMI obligations, when prospects for future income are poor,” the report said.
While the pain in unsecured retail lending is yet to play out, some banks have already voiced their discomfort with the quality of assets in this space.
Uday Kotak, managing director and chief executive officer, Kotak Mahindra Bank, said after the bank’s Q4FY20 results, “Based on what we have seen, I think unsecured consumer loans and credit cards, we see some pain coming clearly in that segment.”
Axis Bank, too, has increased provisioning against its unsecured consumer loans and credit cards.