Unsecured loans pose headaches for lenders

The cracks in India's unsecured loan market deepened in the June quarter, with defaults now spreading beyond traditional segments.

- Anshika Kayastha & Gopika Gopakumar

Lenders grappling with borrowers failing to repay collateral-free loans saw the situation worsen in the last three months, as new categories like small business loans and financing for commercial vehicle purchases increasingly show signs of stress.

Bad debt rose in microfinance, retail commercial vehicle loans, MSME (micro, small, and medium enterprises) loans, personal loans and credit cards, latest analysts' calls of banks and non-banking financial companies showed. Add to that the seasonal impact of slippages in farm loans, and most lenders had to set aside larger amounts for potential loan losses and higher credit costs.

"Lenders are still cautious amid the asset quality stress in unsecured segment, which is reflected in slow loan growth in this segment. This continues to tighten liquidity for the borrowers and their ability to refinance the existing loans, which in turn is leading to asset quality stress for lenders. The big challenge for the lenders is assessment of income," said Anil Gupta, senior vice-president at ratings company Icra.

HDFC Bank's annualized credit cost net of recoveries, rose to 41 basis points (bps) in Q1, from 29 bps both in the previous quarter and year-ago period. At ICICI Bank, excluding agriculture and Kisan Credit Card loans where the bank saw maximum slippages, credit cost for the quarter was around 50 bps compared with 30 bps in the previous quarter.