Banks and NBFCs Exercise Caution in Unsecured Loan Growth Due to Customer Over-Leveraging
Banks and non-banking financial companies (NBFCs), including Axis Bank, Kotak Mahindra Bank (KMB), Bajaj Finance, and Piramal Enterprises, are adopting a cautious approach toward expanding their unsecured loan segments. These segments, which include microfinance loans, personal loans, and credit cards, are facing challenges due to the over-leveraging of customers, according to senior banking officials.
Over-leveraging refers to a situation where a person or business has taken on too much debt relative to their income or ability to repay it. In simpler terms, it means that someone has borrowed more money than they can comfortably manage or pay back.
For banks and NBFCs (Non-Banking Financial Companies), this becomes a problem because when customers are over-leveraged, they are at a higher risk of defaulting on their loans (failing to make payments). This can lead to financial losses for the lenders. In the context of the news you mentioned, banks and NBFCs are being cautious about giving unsecured loans (like personal loans or credit card debt) because they see that some customers are already borrowing too much, and this could increase the likelihood of defaults.
Unsecured loans are especially risky because they are not backed by collateral (like a house or car), meaning the lender could lose money if the borrower can’t repay. So, when banks talk about “over-leveraging,” they’re concerned that too many customers are taking on more debt than they can afford, which could lead to financial trouble for both the borrowers and the lenders.
Kotak Mahindra Bank’s Caution on Microfinance Loans
Ashok Vaswani, Managing Director and CEO of Kotak Mahindra Bank, stated that the bank has deliberately slowed growth in its microfinance loan (MFI) segment due to stress in certain regions. “We restricted growth because we noticed strain about two quarters ago. We expect the strain to continue for maybe two more quarters before stabilizing,” Vaswani explained. The bank remains focused on maintaining a cautious approach in the MFI sector.
Axis Bank’s Risk Management Strategy
Munish Sharda, Executive Director at Axis Bank, echoed similar concerns. Sharda emphasized that the bank is closely monitoring its small micro loan portfolio and is being selective in its lending to avoid areas of potential over-leveraging. “We are very careful with our region-wise focus and exposure. Our disbursals have come down as a result,” he noted. Additionally, Axis Bank has observed early signs of stress in some credit card segments and is tightening its credit score thresholds to mitigate potential risks.
Bajaj Finance Tightens Underwriting Norms
Bajaj Finance, a leading NBFC, experienced a mixed performance in the second quarter of FY25. While the company saw higher volumes and improved operational efficiency, loan losses remained elevated, leading to muted profit growth. According to June 2024 data, customers with three or more live unsecured loans showed a higher tendency to default. In response, Bajaj Finance is tightening its underwriting standards for such customers across all products.
Motilal Oswal, a brokerage firm, had previously estimated that Bajaj Finance’s credit costs—provisions for bad loans—would normalize from FY26. However, the company has now revised its credit cost guidance upwards for FY25, reflecting the ongoing challenges in managing credit risk. Despite a well-diversified product mix, Bajaj Finance’s expansion into new areas like cars, tractors, and commercial vehicles could expose it to more cyclical risks in the future.
Piramal Finance Reports Unsecured Loan Challenges
Piramal Finance also highlighted issues in its unsecured lending segment. The company’s fresh non-performing assets (NPAs) are largely stemming from unsecured credit, with some customers borrowing for investments in the capital markets. Jairam Sridharan, Managing Director of Piramal Finance, acknowledged that unsecured business loans are one of the more problematic areas. “Our approval rate in this segment is around 15%, and we are using advanced tools like machine learning and credit bureau data to maintain credit quality,” Sridharan said.
Conclusion
Banks and NBFCs are becoming increasingly cautious in growing their unsecured loan portfolios due to concerns about customer over-leveraging and rising default risks. Institutions like Axis Bank, Kotak Mahindra Bank, Bajaj Finance, and Piramal Finance are tightening lending standards and focusing on risk management to navigate the current challenges in the unsecured lending space.
