A fortnight after RBI cautioned banks against unprecedented growth in unsecured retail loans and asked them to grow “sensibly”, large banks and NBFCs have flagged increased risks and delinquencies in some small-ticket segments.

As a part of Q2 earnings, ICICI Bank highlighted that market trends and research indicate risk build up and higher defaults in lower ticket loans, especially below ₹50,000 where affordability and repayment ability are constraints.

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Kotak Bank too acknowledged headwinds and higher delinquencies in certain unsecured segments, especially smaller ticket loans, but interim MD Dipak Gupta said the risk-adjusted returns are still “okay”.

Lenders are continuously monitoring these portfolios and haven’t reached a point of putting the brakes or panicking, he said, adding that while the rate of default is higher than last year, it continues to be below pre-Covid levels.

Bajaj Finance, the largest retail NBFC, said leverage levels have worsened for the below ₹50,000 ticket portfolio and the company has cut exposure to borrowers with multiple lines of credit of less than ₹50,000 as it reflects imprudence.

Personal loans up

Personal loans, including credit cards, grew to 10.7 crore in FY23 from 7 crore in FY22 and 4.5 crore in FY20, led by the less than ₹50,000 and above ₹8 lakh segments, as per an internal analysis by Bajaj Finance. Industry AUM for the segment rose to ₹13.5-lakh crore in FY23 from ₹7.5-lakh crore in FY20.

Unsecured retail loans accounted for a significant portion of lenders’ fresh slippages in Q2 FY24, however most lenders dismissed any marked concerns given the smaller share of these loans in the total book and the steady rate of collections and recoveries.

A recent SBI report said unsecured retail loans comprise one-tenth of banks total loans, indicating contained risk at the time. Small-ticket personal loans of below ₹50,000 comprised 2 per cent of banks’ overall personal loans and 0.3 per cent of retail loans as of FY23, according to CIBIL CMI data.

Corrective action

Bajaj Finance has reduced exposure to urban unsecured retail loans by 8 per cent and rural loans by 14 per cent. MD Rajeev Jain said the rural B2C segment looked the most vulnerable at the moment and was the only segment where the lender has taken “corrective action” based on the bounce and slippage rates and portfolio efficiency.

While Kotak Bank will continue its policy of completely providing for unsecured retail loans that are 180 dpd (days past due), RBL Bank said it has accelerated risk mitigation by fully providing for such loans at 120 dpd. This led to the bank providing an ₹48 crore more, in addition to which it also made contingent provisions of ₹252 crore on its microfinance and credit card portfolios.

Yes Bank said it has strengthened underwriting and is strategically going slower in certain retail segments such as unsecured loans, given the increasing trend of delinquencies, especially in the 30 dpd segment.

In the October policy, RBI had asked lenders to strengthen their internal risk mechanisms as the “first line of defence” to avoid any future challenges, adding that robust risk management and stronger underwriting standards are the “need of the hour”.