The unsecured business loan segment has started showing early signs of stress in asset quality, possibly due to the increasing competitive intensity among lenders, domestic rating agency India Ratings has said.
The agency is seeing continuing pressure on cash flows in certain end-borrower segments, on-field attrition, lower-than-expected recoveries leading to higher write-offs and overleveraging of borrowers in the unsecured business loan portfolio.
“While the denominator effect was playing out over most of FY24, the need to recognise the rising delinquencies, provide for them and write-off the same has increased the credit cost pain since 4QFY24,” the agency said.
With the near-term profitability taking a hit, the agency is closely monitoring the developments in the sector and believes that the situation is still not alarming as leverage is at reasonable levels, it said.
Traditional non-bank finance companies (NBFCs) operating through the brick-and-mortar model as well as fintechs extending unsecured business loans are showing signs of increase in their delinquency levels.
These business models are designed to offer loans to micro enterprises in ticket sizes of up to Rs 1 lakh at yields upwards of 25% rate of interest. Fintechs offer these loans as part of their on-balance sheet exposure as well as through off-book arrangements in liaison with a lending partner which can be a larger NBFC or a bank.
“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”, says Karan Gupta, Head and Director Financial Institutions, India Ratings.
Owing to the pent-up demand post COVID-19, micro-enterprises have benefitted from a higher order flow which had led them to borrow more for working capital requirements in FY23 and FY24.
With on-ground demand now plateauing, the added expansionary business cost and rising competition have started to bite into the margins of micro-enterprises, leading to cashflow challenges. This has led to a rise in delinquencies to a certain extent.
Meanwhile, asset under management slowed down in the space because of the caution exercised by lenders (both on- and off-book) and conservatism practiced by them since they are seeing stress building up.
