December , 2023
Unsecured Loans - a high return high risk game
15:35 pm

Saptarshi Roy Bardhan

The November 16 diktat from RBI on regulatory measures towards consumer credit and bank credit to NBFCs is expected rein in the credit binge that is currently observed in the unsecured personal loan space. This will not only up the cost of consumer loans in the country as the risk weightage, a multiplying factor to reflect respective level of risk of loss to the lender, has been increased by RBI, but also may see a general avoidance by the lenders, going forward, of non-collateralised credit.

In its recent report “Making India Credit Fit”, online credit score and loan platform Paisabazar.com, has startling facts. The credit landscape of the country has undergone a gradual change during the last few decades and the average age for availing first ever credit has come down progressively. An empirical find of the research conducted by the platform brings forth the fact that 37% of new credit score consumers are under 25. Particularly, those born in the 1990s and now in their early 20s to early 30s, are obtaining their first credit product at the average age of 23. Vis-à-vis those born in the 1970s started at 38, while the 1980s generation began at 28 to use credit. The sample size of the study is close to 37 million customers / borrowers active in the financial portal’s financial marketplace. The data series is a good pointer to the fact that the young individuals are increasingly embracing the option of credit facilities, in sharp contrast to their aged counterparts.

A further deep dive shows that there is a wider participation of the millennials in the credit market today as they have more choices on the table from banks, NBFCs and FinTechs. The purchase decisions of the youngsters are now largely guided by the financing options rather than availability of cash in the pocket. On the other hand, the demand and supply of credit in the market go hand in hand. There exist numerous schemes to fund every dream like travel, white goods, gadgets etc. which are structured on fixed EMIs (equated monthly instalments) and without tendering any security, movable, or immovable. Innovative schemes like Buy Now Pay Later (B-N-P-L) have also led to more credit propositions in the personal loan space. BNPL is a payment method that allows borrowers to purchase products without a hefty upfront payment. It simplifies big-ticket purchase and offers flexibility with his finances.

The study identifies a natural journey of the borrower from one credit product to another, starting with two-wheeler loans and credit cards at an average age of 28, before moving onto a personal and consumer durables loan later in life and finally buying a home at 33. Another important find of the research is the distribution of the individual loan takers geographically. Both metro and non-metro consumers access 2-wheeler loan products at an average age of 28 and avail the first personal loan and/or consumer durable loan at an age of 29.

RBI figures show that in the banking system the outstanding credit to the individuals has touched `47 trillion which is approx. 32% of the total bank credit. This huge exposure is largely unsecured and runs a higher risk. Experts in the industry opine that personal loans under `50000 have been the fastest growing segment in retail lending which may turn out to be a pain for lenders. As per data of TransUnion Cibil, the credit information company, the individual borrowers of today in this category, are generally saddled with multiple loans from different sources with overdue payments. Since January 2022 small ticket personal loans have accounted for approximately 25% of the total new loan by volume. There’s also an increase in the percentage of credit active borrowers availing a small ticket loan from 3% in June 2019 to 8% in June 2023. Signs of overleveraging on the part of the borrowers are visible. In Q2 of 2023, almost half of the customers availing such loans have been found to be having at least four live loan accounts while applying for the new one. This is three times the Q2 2019 figure. Supposedly these customers are stuck in a debt cycle which is an outcome of financial stress and strain. Of course, the pandemic factor did play a major role. But then opulent lifestyle and peer pressure are no less.

The fall out is quite visible. According to the TU Cibil data, delinquencies in all individual loan segments have improved except for personal loans and credit cards, where they have worsened. In personal loans, accounts with more than 90 days (NPA threshold as mandated by RBI) have increased to 0.84% from 0.44% last year. In credit cards the climb is from 1.46% to 1.63% for the same period. The collection department in the lender's office has a harrowing time as such defaulting borrowers play truant, and in some cases, absconding. Taking a legal recourse does not always yield effective results. At the end of the road, therefore, a write-off becomes imminent which, in a way, takes a toll on the higher ROI associated with these unsecured credit facilities.

Looking at this scenario, the bankers were also pessimistic about the small ticket personal loan product and anticipate some RBI diktat forthcoming in this regard. “It may be in the form of hiking the risk weightage against this loan product,” said the market grapevine. Finally, RBI fired its salvo after several months of trying to sensitise the lenders about the unsecured personal loans in their respective portfolio.

As per the RBI prescription the risk weightage on the consumer credit exposure of bank and NBFCs (outstanding as well as new) categorised as retail loans has been hiked by a fourth from 100% to 125%. However, housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans will be excluded from such a hike. Further, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. In a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively. And thirdly, exposures of SCBs to NBFCs, (excluding core investment companies), are risk weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI). On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points. All these, would suck in more capital for the lenders and is expected to slow down the faster growth in this segment.

It is true that lenders are saddled with an unsecured loan portfolio which has touched an alarming level riding the consumption trajectory post Covid. The durable purchases during the festival season were spiced up with attractive EMI offers. Then there are loans, as reported by the apex bank, which are bereft of adequate security cover. For example, top up loans provided by some lenders on vehicles which are 5 -6 years old. Prima facie there is an asset as an underlying security. But the quality and marketability of the asset is itself questionable. All these point to the fact that though the segment generates a good ROI for the lender, ranging from 10.5 % to 25%, it also has very many aberrations that need to be assessed and controlled.

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