Unsecured Loan Performance Declines: India Rating Report

With deteriorating financial conditions of borrowers, the performance of unsecured assets classes, including microfinance loans and unsecured business loans, is worsening, according to a report by India Ratings and Research.

According to the India Ratings and Research reports, the declining financial conditions of the borrowers has indeed affected the performance of unsecured assets classes which includes microfinance loans and unsecured business loans which are worsening.

However, the agency states for secured asset classes, it has a stable performance outlook given the recovery in the economy in FY22.

The report states, "The performance of unsecured asset classes, such as microfinance loans, unsecured business loans and consumer loans, is worsening, given the borrower's depleted financial cushions and the nature of these loans."

The Reserve Bank of India’s moratorium on repayment of loans has slowed down the stress in these segments that delinquencies and have not yet stabilised and higher loan losses are expected to materialise in FY22, says the report.

However, the agency has noted that the vehicle loans such as loans for commercial vehicles, passenger vehicles as well as two-wheelers have a stable asset performance outlook, given the pickup in economic activities witnessed in the second half of FY21.

The report says, "Secured business loans (principally loans against property) also have a stable asset performance outlook, due to the borrower's higher propensity to repay."

It further adds that the small business loans are forecasted to witness differentiated performances depending on the loan type. According to the report, digitisation initiatives are also expected to help with better portfolio monitoring and in reducing soft delinquencies.

"The focus has shifted to building quality secured loan portfolios, upping process efficiency and automating customer follow-ups". Furthermore, it is observed that the recovery momentum and continued policy support in FY22 would be the key for loan performance.Indian securitisation transactions predominantly involve asset classes where the borrowers are either small and micro enterprises/ businesses, or belonging to low and middle-income households, says the report.

The report also said the severity of the impact of the pandemic on their income as well as the impact of the moratorium and fiscal measures on their credit behaviour is varied.

It adds, "Thus, the effectiveness and inclusiveness of government support schemes to improve the financial position of the end-borrowers is crucial and is a key monitorable."