Unsecured business loans showing early signs of stress: India Ratings

After micro-loans exhibited pressures from the second half of FY24, the unsecured business loans (UBLs) segment has now started showing early signs of stress, possibly due to continuing strain on cash flows in certain end-borrower segments and on-field attrition, according to India Ratings.

The rating agency, in a statement, said the asset quality of UBLs may also be impacted by lower-than-expected recoveries, leading to higher write-offs, over-leveraging of borrowers, and increasing competitive intensity among lenders.

While the denominator effect played out over most of FY24, the need to recognise rising delinquencies, provide for them, and write them off has increased credit cost pressures since Q4 FY24.

India Ratings data showed that the UBL segment experienced a high growth rate in the post-pandemic period, with 67 per cent growth in FY23 followed by 42 per cent in FY24. However, year-on-year growth was flat in Q1 FY25 as lenders became more cautious about this segment.

Credit costs, reflecting provisioning and write-offs, grew from 3.4 per cent in FY23 to 4.8 per cent in FY24 and further to 5.1 per cent in Q1 FY25.

With near-term profitability taking a hit, the agency is closely monitoring developments in the sector. However, the situation is not yet alarming as leverage remains at reasonable levels (Q1 FY25: 3.1x; FY24: 2.9x; FY23: 2.8x), it added.

Traditional non-bank finance companies (NBFCs) operating through brick-and-mortar models, as well as fintechs extending UBLs, are showing signs of increasing delinquency levels.

These business models are designed to offer UBLs to micro-enterprises in ticket sizes of up to Rs 10 lakh at yields upwards of 25 per cent annual interest. Fintechs offer these loans as part of their on-balance sheet exposure, as well as through off-book arrangements in liaison with a lending partner, which can be a larger NBFC or a bank.