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Personal Lending Sectoral Analysis : The Way Ahead for NBFCs and Banks
The unsecured lending sector in India, comprising Banks and Non-Banking Financial Companies (NBFCs), has shown significant growth, with a combined credit Compound Annual Growth Rate (CAGR) of 12% from FY17 to FY23, reaching Rs.170.5 lakh crore. The personal loan segment, in particular, has grown even more rapidly, almost tripling in size over the past six years. A notable rise in unsecured personal loans, including credit card debts and consumer loans, has been observed, making up about a third of banks' total personal loan portfolio.
Several factors have driven this growth, including demographic shifts, increased purchasing power, the proliferation of FinTech companies, and advancements in digital technologies and payment systems. Enhanced data from credit bureaus has also contributed to the efficient operation of lenders' credit engines.
Despite the rapid expansion, the sector has managed risks effectively through technology and expert personnel. Regulatory measures like the Digital Lending Guidelines and the Privacy Bill have further strengthened the market's stability and consumer confidence.
The borrower count has seen a marked increase post-pandemic, particularly among NBFCs, which have experienced a surge in small-ticket loan originations. However, banks still dominate in terms of origination value due to their focus on larger loans. The quality of unsecured retail assets remains robust, with a declining trend in non-performing assets (NPAs) and a decrease in below-prime borrowers.
Fintech NBFCs have been identified as the most vulnerable to risks in unsecured personal loans. In response, the Reserve Bank of India (RBI) has increased risk weights for unsecured consumer credit and certain NBFCs to mitigate potential risks. The RBI's regulatory actions, focusing on consumer credit growth, could impact the sector's growth trajectory in the short to medium term.
Exploring the Dynamics of Unsecured Lending in India: Opportunities and Risks
The landscape of unsecured lending in India has undergone significant changes over the years. This analysis delves into the intricacies of this sector, examining its growth trajectory, underlying factors, and associated risks.
The Growth Trajectory of Unsecured Lending
From FY17 to FY23, the Indian banking sector, comprising Banks and Non-Banking Financial Companies (NBFCs), witnessed a notable Compound Annual Growth Rate (CAGR) of 12%, culminating in a massive credit pool of Rs.170.5 lakh crore as of March 2023. Within this, the personal loan segment, a key indicator of consumer spending habits, has shown remarkable growth. The personal loan book has almost tripled in the past six years, reaching Rs.51.7 lakh crore, forming 30.3% of the overall loan book as of March 31, 2023. This growth rate nearly doubles that of business lending within the sector.
Unsecured Personal Loans: Outpacing the Market
The unsecured personal loans category, including credit card receivables, consumer durable loans, and other personal loans, has grown at an even more rapid pace. Between March 2017 and March 2023, this segment expanded at a CAGR of 21.0%, outstripping the broader personal loan growth, and representing a significant portion of the banks' personal loan credit.
Factors Fueling the Demand for Unsecured Loans
The surge in unsecured personal loans can be attributed to various socio-economic and technological factors. These include:
Demographic Shifts: India's youthful population, increasingly seeking financial products, has been a crucial driver.
Economic Formalization: With India's economy becoming more structured, there's been an increase in documented and bankable income, leading to more people being eligible for loans.
Increased Purchasing Power: Rising incomes have enabled more individuals to seek credit for various needs.
Emergence of FinTechs: FinTech companies have revolutionized the lending process, making loans more accessible through digital platforms.
Internet and Smartphone Penetration: Wider internet and smartphone access have made financial services more accessible to a broader segment of the population.
Digital Payment Adoption: The growing acceptance of digital payments has facilitated easier loan repayments and financial transactions.
India Stack and Information Collateral: The India Stack initiative and the availability of digital data have made it easier for lenders to assess creditworthiness.
Credit Bureau Expansion: The broadened scope of credit bureaus has improved risk assessment capabilities for lenders.
Managing Risks in High Growth
Despite the rapid growth, concerns about potential risks in the unsecured lending space have been raised. Lenders have leveraged technology and specialized expertise to manage these risks effectively. Regulatory interventions, like the Digital Lending Guidelines and the Privacy Bill, have also played a crucial role in enhancing consumer protection and providing a clear framework for market players.
The Evolving Borrower Landscape
Post-COVID-19, there has been a resurgence in the number of borrowers across various lending segments, particularly from NBFCs. Fintechs have been instrumental in attracting a younger demographic and individuals new to credit, leading to an increase in low ticket-size loans. This trend is reflected in the declining average ticket size of NBFC loans.
Asset Quality and NPAs
In terms of asset quality, the retail non-performing assets (NPAs) in unsecured loans have shown a declining trend for both public and private sector banks. This trend indicates a move towards healthier lending practices and more effective risk management by lenders.
Fintech NBFCs: The Most Vulnerable Group
A poll conducted by CareEdge Ratings revealed that Fintech NBFCs are most vulnerable in the unsecured personal loan segment, necessitating a more cautious approach to risk management in this sector.
RBI's Regulatory Response
The Reserve Bank of India (RBI) has responded to the growth in unsecured loans with regulatory measures aimed at mitigating potential risks. These include increasing risk weights for unsecured consumer credit and bank credit to NBFCs, intended to curb growth in this sector while maintaining healthy capital ratios.
The Future of Unsecured Lending
Looking ahead, the unsecured personal loan segment, particularly in the small ticket size category, is expected to continue growing, driven by technological advancements in loan origination and a focus on improving credit quality. Regulatory clarity on critical aspects such as business models, default loss guarantees, disclosure norms, KYC norms, and fair practices are likely to attract more participants and capital into this segment. However, the RBI's recent actions aimed at deterring consumer credit growth might impact the segment's growth momentum in the short to near term.
Detailed Insights into Key Aspects of Unsecured Lending
To provide a comprehensive understanding, let's delve deeper into several critical aspects of the unsecured lending sector:
Consumer Behavior and Loan Utilization: Understanding how consumers are utilizing these unsecured loans is crucial. Are they used for emergency expenses, debt consolidation, or lifestyle spending? This insight can help gauge the sector's sustainability.
The Role of Technology in Lending: How have technological advancements like AI, machine learning, and big data analytics transformed the lending process? What are the implications for customer experience and risk assessment?
Regulatory Challenges and Compliance: Exploring the challenges faced by lenders in adhering to regulatory requirements, especially in a rapidly evolving digital landscape.
Credit Assessment and Risk Management: Analyzing the methods used by lenders to assess creditworthiness and manage risks associated with unsecured lending. How have these methods evolved, and what are their implications for the sector's health?
Impact of Economic Changes: Examining how macroeconomic factors like inflation, interest rate fluctuations, and economic downturns affect the unsecured lending market.
Market Competition and Consumer Choice: Understanding the competitive dynamics of the market. How do traditional banks compete with FinTechs, and what does this mean for consumer choice and service quality?
Innovations in Unsecured Lending: Identifying recent innovations in product offerings, service delivery, and customer engagement strategies in unsecured lending.
Global Trends and Comparative Analysis: Comparing India's unsecured lending market with global trends. How does India's market differ, and what lessons can be learned from international experiences?
Sustainability and Social Responsibility: Discussing the ethical considerations and social responsibility of lenders in promoting financial inclusion while avoiding over-indebtedness among borrowers.
Future Outlook and Predictions: Projecting future trends in the unsecured lending sector. What can stakeholders expect, and how should they prepare for the evolving landscape?
UNSECURED LENDING: A Path to Expansion or an Emerging Hazard?
In the financial landscape, the combined credit growth of Banks and Non-Banking Financial Companies (NBFCs) exhibited a Compound Annual Growth Rate (CAGR) of 12% from FY17 to FY23, reaching a substantial Rs.170.5 lakh crore as of March 2023. During this interval, the personal loan segment, encompassing retail for NBFCs, outpaced this with a 19% CAGR. Specifically, personal loans from banks and NBFCs have nearly tripled over the past six years, escalating from Rs. 18.6 lakh crore (21.5% of total loans) in March 2017 to Rs.51.7 lakh crore (30.3%) by March 2023. This surge in personal loans, often linked to consumer spending, is markedly higher than the growth seen in other banking sector loans, typically associated with business financing.
The rise in unsecured personal loans, which include credit card debts, consumer durable loans, and other personal loans, has been even more pronounced. From March 2017 to March 2023, these loans have seen a CAGR of 21.0%, surpassing the overall personal loan growth rate. As of March 2023, these unsecured loans constituted about one-third of the total personal loan portfolio of banks, which stood at approximately Rs. 41 lakh crores.
The significant uptick in unsecured personal loan demand can be attributed to a variety of factors. These include demographic changes, the economy's formalization, increased consumer purchasing power, the rise of FinTech companies, widespread internet and smartphone access, digital payment adoption, India stack and information collateral's impact, and enhanced credit bureau coverage. The fusion of technology and finance has revolutionized India's lending landscape, making personal loans more accessible and appealing to a broader population segment, thereby fueling the personal loan market's expansion. Additionally, the enhanced data from credit bureaus is expected to refine lenders' credit engines, allowing for more efficient use of machine learning to bolster the creditworthiness of originated loans.
Despite the rapid growth rate raising some concerns, the use of technology and specialized expertise has been crucial in effectively managing associated risks. Regulatory frameworks like the Digital Lending Guidelines and the Privacy Bill have bolstered consumer confidence and provided clear operational guidelines for market participants. This evolution in the industry, accompanied by increased regulatory clarity, has matured the market, enhancing its stability.
Post-pandemic, the borrower count has significantly rebounded across various lending segments, particularly among NBFCs, which have seen a notable surge in loan origination volumes. The advent of FinTech firms, targeting younger demographics and new credit users, has led to a proliferation of small-ticket loans, thereby reducing the average loan size among NBFCs. In FY23, loans below Rs. 1 lakh accounted for over 85% of total loan originations by volume, with those below Rs. 50,000 dominating in terms of volume and witnessing a more than two-fold increase in value over the last two fiscal years.
However, it's important to note that banks, due to their focus on larger loans, dominate in terms of origination value, despite a lower volume share. Private sector banks, akin to NBFCs, have seen a decrease in average loan size over the years, whereas Public Sector Banks (PSBs) have experienced an increase in average ticket size, maintaining their lead in loan value share.
Unsecured Retail Asset Quality Remains Solid
Lending in any asset category inherently carries risks, particularly concerning asset quality. The percentage of retail non-performing assets (NPAs) in unsecured loans, excluding secured classes like housing, auto, and education loans, has been gradually declining for both Public and Private sector banks. Moreover, the proportion of below-prime borrowers (with credit scores below 730) has been decreasing over the past three years across lenders, indicating a movement towards healthier lending practices and effective risk management.
As of March 31, 2023, the Special Mention Account (SMA) categories, namely SMA 0, SMA1, and SMA 2, showed a higher percentage for public sector banks in unsecured personal advances compared to private banks in the unsecured retail loan category. Overall, banks have around 7% of their unsecured retail loans in these SMA categories, a figure that is notably similar for secured retail advances.
Fintech NBFCs: The Most Vulnerable in Unsecured Personal Loans
According to a poll by CareEdge Ratings, Fintech NBFCs are perceived as the most vulnerable to risks in unsecured personal loans, followed by private and public sector banks and other NBFCs. This highlights the need for Fintech NBFCs to maintain a vigilant approach to risk management in this loan segment.
Regulatory Concerns and RBI's Actions
The Reserve Bank of India (RBI) has taken steps to mitigate risks in the unsecured lending space. This includes a 25% increase in risk weights on unsecured consumer credit, excluding housing, education, vehicle, and gold loans, and a similar increase for bank credit to NBFCs rated between AAA and A. Additionally, the RBI has raised risk weights for credit card receivables and bank credit to certain NBFCs. All lending institutions are also required to review and implement sectoral or sub-segment exposure limits for consumer credit as part of prudent risk management.
Outlook
The unsecured personal loan segment, particularly in the small-ticket category, continues to grow, driven by technological integration in loan origination and a focus on enhancing credit quality and collection practices. Regulatory clarity on key aspects like business models and disclosure norms is expected to attract more players and capital into this segment. However, the RBI's recent regulatory actions aimed at curbing consumer credit growth could impact this momentum in the short to medium term.
Conclusion
The unsecured lending sector in India is at a critical juncture, characterized by significant growth potential tempered by the need for cautious risk management. The convergence of technology, regulatory measures, and evolving consumer behaviors are shaping this dynamic sector. As it continues to evolve, stakeholders must navigate these complexities to harness the opportunities while mitigating potential risk
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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