Unsecured business loans are showing early signs of stress in asset quality in India, reveals the latest report from India Ratings and Research.  The agency believe that this stress signs come at the back of increasing competitive intensity, continuing pressure on cash flows, on-field attrition, and over-leveraging of borrowers.

Speaking to CNBC-TV18, Pankaj Naik, Director, India Ratings and Research said, “We have been tracking this segment for quite some time and in our outlook for FY25, we did mention that this particular segment will see some kind of a stress because of some over leveraging on the borrower side, and also because of strain on the cash flows at the borrower’s end. Some bit of aggressive lending by the NBFC is also responsible for this kind of stress.”

He noted, “Incremental delinquencies have gone up, write-offs have increased, and the credit costs impacting the profit and loss statements (P&L) have started to show negative repercussions.”

Current credit costs are reported to exceed 5%-6%, a significant increase from previous levels of around 3%-4%.

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Naik elaborated that such elevated credit costs, which encompass both write-offs and provisioning, begin to erode pre-provision operating profit buffers, often resulting in losses on P&L statements for those in the unsecured business loans market.

He added, “The Q1 number looks very very elevated as compared to say an FY24 number so 3 to 4% credit cost has now basically gone into 5 to 6% kind of a trajectory.”

The rating agency observed that both traditional non-bank finance companies (NBFCs) using brick-and-mortar models and fintech firms providing unsecured business loans are experiencing rising delinquency levels.

These business models aim to extend unsecured business loans to micro-enterprises, with loan amounts reaching up to ₹1,000,000 and interest rates exceeding 25%.

Naik observed that balance sheets in the unsecured business loan segment had been experiencing substantial growth, typically ranging from 30% to 50%. However, this growth was occurring from a relatively low base.

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Naik also pointed out that lenders are exercising caution due to challenges such as funding availability and pressures on asset quality. This cautious approach has contributed to the slowdown in loan book growth, leading to a significant impact on assets under management (AUM) growth.

Despite these challenges, the rating agency emphasised that it is actively monitoring the sector and that the current situation is not alarming.

Naik pointed out that leverage levels remain reasonable, with most NBFCs operating at a leverage ratio of about three times their assets, and their capital buffers are still adequate.

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