Banks Need To Monitor Small-Ticket Personal Loan Exposures

Amid concerns raised by the Reserve Bank about unsecured lending, a credit information company released data on Thursday which stresses the need to monitor exposures to the small-ticket personal loan segment.

A fourth of the overall retail loan originations by volume between January 2022 to June 2023 have been small ticket personal loans of less than Rs 50,000, while over half of the borrowers in the segment in the June 2023 quarter already had four active credit products while getting a new loan, Transunion Cibil said.

RBI Governor Shaktikanta Das last month asked banks to pay more focus on the unsecured lending segment, flagging the risks to financial stability it portends.

“Strengthen your internal surveillance mechanisms so that any risks that may likely be building up are handled upfront, rather than coming to grief at a later time,” Das had said.

From a delinquency perspective, there was an uptick in the small ticket personal loans of less than Rs 50,000 that were unpaid for over 30 days during the first six months of a loan at 10.24 per cent in December 2022 as against 7.56 per cent in December 2019, the CIC report said.

At the overall level, there was a 0.40 per cent increase in the loans due for over 90 days to 0.84 per cent under the overall personal loans segment.

Higher share in loan originations has taken the share of credit active consumers with at least one live personal loan of less than Rs 50,000 to 8.1 per cent of the total in June 2023 from just 3.1 per cent in June 2019, the report said.

For consumers having at least one small-ticket personal loan, the balance-level delinquency rate was 5.4 per cent, marking an increase of 1.20 per cent since Q2 2022, the report said.

Delinquencies on small-ticket personal loans have a marginal impact on the overall retail loan portfolio, which also includes home loans and auto loans, the CIC said, adding small-ticket personal loans of less than Rs 50,000 account for 0.3% of the total retail loan book size at an industry level.

"Even though delinquencies on small-ticket personal loans have a marginal impact on the personal loan portfolio, these need to be monitored closely, especially because consumers may prioritize other payment obligations ahead of personal loan payments, which in turn may be a wider indicator of financial stress,” it said.

The CIC's managing director and chief executive Rajesh Kumar said the “marked increase” in the volume of consumption loans along with velocity is a “clear call” for lenders to monitor the vintage delinquencies closely.

“Strong underwriting process, focused regular monitoring of consumer behaviour, and robust credit risk management practices are essential if these opportunities are to be nurtured for long-term profitable growth,” Kumar said.

The overall retail loan portfolio reported healthy retail credit growth and broadly stable delinquency levels for the June quarter, Kumar said, adding that some pockets show signs of risk build-up.