Lenders wary of unsecured loans with rise in over-leveraged clients
Banks and non-banking finance companies (NBFCs), including Axis Bank, Kotak Mahindra Bank (KMB), Bajaj Finance and Piramal Enterprises, are being cautious in growing unsecured loan segments such as micro, personal and credit cards on account of over-leveraging of customers, senior bankers say.
“On the MFI (microfinance loans) side of business, we restricted growth because as we called out about 2 quarters ago, we were seeing some strain. We are being cautious on growing in the MFI space. We expect the strain to continue for maybe two quarters, then it should get stable,” said Ashok Vaswani, MD & CEO, KMB, adding that the stress in MFI segment is currently confined to certain states.
“Tech embargo has had an effect, particularly on credit card business. Our total share of unsecured retail asset businesses has dipped a little bit to a shy over 11 per cent. In credit card business, we have also seen some level of credit stress due to over leveraging of certain kind of customers,” he said. KMB’s fresh slippages increased to ₹1,875 crore in Q2FY25 from ₹1,314 crore in Q2FY24 and ₹1,358 crore last quarter.
- Read: NBFCs under scanner
Axis Bank ED Munish Sharda said the bank has a small micro loan portfolio, which it is monitoring ‘very carefully’. “We have taken risk actions to ensure that we do not venture out into areas which can get over-leveraged, where over-leveraging may be happening. We are also very careful in having a sharp focus on area-wise, region-wise, state-wise, focus on exposure, which we continue to maintain. So, our disbursal has come down,” he said.
The bank’s officials also said there are certain segments in credit cards which are showing signs of early stress and indebtedness. To counter the same, the lender is tightening credit score threshold for credit cards and curtailing spending limits.
NBFCs
NBFC major Bajaj Finance had a mixed quarter in Q2FY25, witnessing higher volumes and operating efficiencies but loan losses remained elevated, resulting in muted profit and return on asset (ROA) growth. The NBFC’s leverage analysis basis June 2024 bureau data showed that customers having 3 or more live unsecured loans are showing higher propensity to default and lower collection efficiencies. Accordingly, the lender is further tightening its underwriting norms for such customers across all products.
Brokerage Motilal Oswal said earlier it was under the impression that Bajaj Finance’s credit costs—provisions for potential bad loans–would remain elevated in FY25 and normalise from FY26 onwards. However, the company has now increased its credit costs guidance to 185-195 basis points (bps) as against 175-185 bps earlier for FY26.The NBFC’s key product segments, until now, have been the secular growth segments. However, its foray into multiple new areas, such as cars, tractors, commercial vehicles, and MFI could in future make its growth and credit costs vulnerable to cyclicality, despite having a well-diversified product mix.
Another large NBFC Piramal Finance today said a chunk of its fresh slippages have emanated from unsecured credit segment, and that unsecured credit customers are showing signs of over-leveraging, with certain borrowers taking loans for investment in capital market as well.
“A lot of this (NPAs) is unsecured business, rest of the businesses have not contributed very much to stage 3 (NPAs) yet…In unsecured business loans, which is one of the more challenged segment, our approval rate today is in range of 15 per cent…,” said Piramal Finance MD Jairam Sridharan, adding the lender is using machine learning, credit bureau scores and a host of internal measures to ensure credit quality is maintained.