A rising propensity for personal loans and attractive risk-adjusted returns are the possible reasons driving the non-banking finance companies (NBFC) to grow on such loans, domestic rating agency Crisil said.
The going has been very difficult for the NBFC segment since the crisis at infra-focused lender IL&FS in September 2018, with liquidity getting scarce and the economy slowing down.
Crisil said the growth in the unsecured books at 25 per cent is four times that of the decadal lows in overall assets under management, which are set to clock a 6-8 per cent growth in FY2020.
It is, however, lower than the compounded annual growth rate of 30 per cent in unsecured loans clocked for the fiscal fiscal years till FY2019, it said.
Since the IL&FS crisis, the major factors that hit the non banks include constrained funding access amid rising borrowing costs, re-calibration and de-risking of loan books, and economic slowdown, it said.
The unsecured loans segment has emerged a favourite because of a structural shift in conducting the business, wherein there is a larger reliance on credit bureau data, the higher risk-adjusted returns where other segments are struggling to grow and an ability to have higher profit margins.
"Growth in this segment (unsecured) hasn't emerged unscathed by the recent turmoil, but the impact on it has been relatively lower," its senior director Krishnan Sitaraman said.
He added that the share of unsecured loans in the overall assets under management for the non-bank lenders is set to grow by 1.50 percentage points in a single year to 9 per cent now.
Acknowledging that the delinquencies are not yet alarming, the agency warned the "frenetic growth can also spawn asset quality worries because repayments can become highly volatile based on macro-economic and region-specific events".
Delinquencies in the personal and consumer durables loans are expected to inch up this fiscal but will still be under 3 per cent, while the over 90-day overdue repayments on unsecured loans to small businesses are set to grow by up to 0.60 per cent over the 4.5 per cent level in FY19, it said.
The two and three-wheeler loans stress is also expected to rise by a similar 0.50-0.60 per cent, it said.
"While the reported non performing assets in these segments do not seem worrisome at this juncture, write-offs have been very high because recoveries after default are typically very low," its associate director Rahul Malik said.
The agency also said that non-banks and borrowers alike seem to have attained a degree of ease with regards to dealing in unsecured loans, but underlined that there is a need to have strong capital buffers. AA MRMR