Unsecured business loans show early fall in asset quality: India Ratings

Unsecured business loans showed early signs of stress in terms of asset quality on higher leveraging of borrowers and increased write-offs, said India Ratings in a research note on October 3.

“ Post the MFI segment, early signs of stress are visible in the unsecured business loan segment with an increase in credit costs and higher-than-expected write-offs. On-field attrition, pressure in certain end-borrower segments and overleveraging of borrowers are the factors that have contributed to this asset quality pressure” said Karan Gupta, Head and Director Financial Institutions, Ind-Ra, in the note.

The rise in delinquency levels were observed both in brick and mortar Non Banking Finance Corporations (NBFCs) and fintech lenders, the rating agency noted. A growth in pent-up demand after Covid -19 pandemic led to increased orders. This led to companies borrowing to meet their working capital requirements. A moderation from that level of consumption has increased the delinquencies, Ind-Ra noted.

The increase in stress has made the lenders more conservative leading to stagnant growth in Asset Under Management (AUM) in Q1FY25, as against the prevoius fiscal, when the growth was nearly 50%, according to the credit rating agency. The AUM for the first quarter of current fiscal was around ₹20,000 crore and this has not changed from fiscal 2024.

An uptick in credit cost has for NBFCs, has reduced profitability and smaller NBFCs with lower credit rating are more affected. This has pushed them to borrow from larger NBFCs and small finance banks further reducing their profitability, the rating agency said in its research note.

NBFCs are also planning to diversify in to secure lending sectors, but this would lead to the requirement of expertise in those sectors. Moreover, higher competition from banks in the sector will not allow NBFCs to change rates, Ind-Ra noted.

The rating agency however said that it was monitoring the sector and that the situation is still not alarming as leverage is at reasonable levels. Capital buffers are still reasonable for NBFCs with most of them operating at a leverage thrice their assets, said Ind-Ra in the note.