Performance of unsecured loans worsening, says India Ratings 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.

For secured asset classes, the agency said, it has a stable performance outlook given the recovery in the economy in FY22.

"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 report said.

The Reserve Bank of India's moratorium on repayment of loans has delayed the stress in these segments where delinquencies have not yet stabilised and higher loan losses are expected to materialise in FY22, it said.

The agency noted that vehicle loans -- including loans for commercial vehicles, passenger vehicles and two-wheelers -- have a stable asset performance outlook, given the pickup in economic activities witnessed in the second half of FY21.

Small business loans are expected to witness differentiated performances depending on the loan type, it said.

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

As per 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".

It noted that recovery momentum and continued policy support in FY22 will be 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, it said.

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.

"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," it added.