Festive lending slowed in Q3 amid strict norms, tight liquidity: Report

Festive lending in the October-December quarter of the financial year 2024-25 (Q3FY25) saw a decline compared to the year-ago period amid tight liquidity, rising household debt and stricter regulatory norms, which led to cautious lending, according to CRIF High Mark Report.

 

Unsecured segment - personal loans and consumer durable loans – contracted sharply in value by 6.7 per cent year-on-year (Y-o-Y) and 1.9 per cent Y-o-Y respectively, whereas the secured segments – home loans- rose by 0.1 per cent Y-o-Y. Auto and two-wheeler loans saw a muted growth.

 

According to the report, key contributors for the slowdown included lack of softened interest rates, increase in risk weights on unsecured loans, and broader macroeconomic challenges.

 

Additionally, the RBI’s Financial Stability Report (Dec’24) highlighted rising household debt, with super-prime borrowers utilising loans for asset creation and subprime borrowers increasingly relying on credit for consumption.

 

Personal loan originations saw a steep decline in Q1FY25 after consistent growth up to Q3FY24. It posted 6.7 per cent drop Y-o-Y amid the Reserve Bank of India’s (RBI) increased risk weights for consumer credit along with increased delinquencies in unsecured loans.

 

“While some recovery has occurred since then, the market has yet to fully rebound,” the report said.

 

Traditional banks have adopted a cautious stance following RBI advisories on unsecured loans. NBFCs, fintech lenders seem to be gaining traction amid slower growth. Loans with average ticket size less than ₹50,000 increased to 96.4 per cent from 91.5 per cent in Q3FY24, while the share of private banks dropped to 3.4 per cent in Q3FY25.

 

“For loans of ₹50,000 or less, NBFCs are prominent players in both value and volume, driven by Fintech NBFCs’ focus on high-volume, small-ticket loans. For loans above ₹50,000, NBFCs seem to be gaining market share in origination value and volume, gradually outpacing PSU banks and private banks, even amid a broader market slowdown,” the report said.

 

While rising prices and stagnant real wage growth has constrained consumer spending, it has resulted in 2 per cent drop in consumer durable loans. The share of loans by NBFCs have increased to 80.6 per cent from 70.7 per cent, while the share of private banks declined to 19.4 per cent from 29.3 per cent last year.

 

For auto loans, Q3 consistently recorded the highest auto loan origination values across financial years due to festive demand. However, in 2024, subdued rural demand ahead of the festive season resulted in banks and financial institutions to offer attractive terms and benefits. The growth in auto loans was down to 7 per cent Y-o-Y in Q3FY25 as against 20.5 per cent Y-o-Y in Q3FY24, showing weak consumer spending. Growth in two-wheeler loan origination was down to 10 per cent from 24.9 per cent Y-o-Y in the year-ago period.

 

Amid possible supply-side constraints impacting originations, PSU banks and NBFCs continued to gain origination value share, while private banks experienced a significant slowdown.

 

The lenders have also started prioritising low-risk borrowers across segments. The low-risk categories (overall) have shown a notable increase, growing from 23.1 per cent in Q3FY23 to 28.8 per cent in Q3FY25, reflecting a shift towards safer lending practices. Concurrently, a positive trend is evident in the reduction of high and very high-risk loans (overall), which decreased from 11.2 per cent in Q3FY23 to 9.4 per cent in Q3FY25, highlighting improving risk assessment and cautious lending decisions.