Latest News

Banks and NBFCs giving Personal Loans to already existing Defaulters


➡️ Click here to join our Whatsapp Group

There has been a significant increase in unsecured lending, particularly by fintech companies and NBFCs, as they target new-to-credit customers. Many of these customers, who are mostly millennials and Gen Z, are opting for small ticket size loans. However, a concerning trend has emerged with a growing number of these newly acquired customers defaulting on their loans. This has resulted in a poor quality of borrowers in the unsecured credit market.

Growth of Personal Loans and Small Ticket Sizes

The disbursement of personal loans has seen a steady rise. As of June 2023, personal loans accounted for 6.7% of total loans disbursed, compared to 3.1% in March 2018. The volume of personal loans has grown almost 12 times, while the value has increased by 3.5 times. In FY18, 8.2 million personal loans were disbursed, which skyrocketed to 101.3 million by FY23.

It is worth noting that most of these personal loans are of small ticket sizes, less than Rs 1 lakh. The volume of small ticket loans has seen a staggering 31 times growth, with 2.8 million loans disbursed in FY18 and 87.9 million in FY23. The report attributes this growth to NBFCs and fintechs, which account for 82% of all personal loans disbursed. However, in terms of value, they only make up about 30%.

Increase in Unsecured Personal Loans

Unsecured personal loans have seen a significant jump, increasing more than four-fold from Rs 4.26 trillion in March 2017 to Rs 13.32 trillion in March 2023. In FY23, NBFCs accounted for four out of five personal loans disbursed. This marks a shift from FY18, where 35% of personal loans were disbursed by NBFCs and 65% by banks. This shift is attributed to technological innovation and the entry of fintechs in the market. As a result, 82% of total personal loans are now disbursed by NBFCs, while banks account for 18%.

Concerns about Borrower Quality and Debt Spiral

Despite the growth in personal loans, there are concerns about the quality of borrowers. The report reveals that approximately two-fifths of personal loans are given to borrowers who already have more than five existing loans. This suggests that some borrowers are using the loans to rotate money across multiple debts, leading to a debt spiral. In December 2023, the RBI intervened by increasing the risk weight of personal loans to 125%, requiring lenders to raise more capital. This measure aims to slow down lending but not stop it entirely.

Impact on NPAs and Delinquency Rates

The rise in personal credit, particularly to high credit risk customers, has led to higher non-performing assets (NPAs). The default rate is higher for loans with lower ticket sizes. Over a quarter of loans above Rs 50,000 are classified as NPAs with 90+ days due. Additionally, there has been a more than three-fold increase in loans to borrowers with a 90+ day due loan. In FY23, approximately 23.1% of new loans were given to borrowers with at least one delinquency, doubling from FY19.

Addressable Market for Credit Approaching its Limit

The report also highlights that India is nearing the limit of its addressable market for credit, with 258 million borrowers. This suggests that the market may be reaching saturation in terms of potential borrowers.

In summary, the rise in unsecured lending, particularly in personal loans, has led to a surge in small ticket size loans. However, this growth has also brought concerns about the quality of borrowers, with a significant number defaulting on their loans. This has resulted in higher NPAs and delinquency rates. The RBI has intervened to address the issue but lending is expected to continue, albeit at a slower pace.

One Comment

  1. How do other FIs lend to existing defaulters when the CIBIL has all the credit information / history of a defaulting borrower.

Leave a Reply

Your email address will not be published. Required fields are marked *