Thursday, November 30, 2023

personal loans: Signs of stress in small ticket personal loans: Report

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Small ticket borrowers are slowly starting to miss their repayments and seen to be delaying repayments beyond a month of the scheduled date.For consumers having at least one small-ticket personal loan, the balance-level delinquency rate or the percentage of borrowers missing a repayment was 5.4% in Q2’ 2003-24 , up 120 bps (basis points) since Q2 2022-23 a report by credit bureau Transunion Cibil notes.

During Q2’ 2023, overall balance-level serious delinquencies (measured as 90 days or more past due) improved across product categories, except for credit cards and personal loans according to the report.

But delinquencies on small-ticket personal loans have a marginal impact on the overall retail loan portfolio, which looks at the outstanding balances of all retail products including home loans, auto loans, credit cards, personal loans, and others.

Small-ticket personal loans of less than Rs 50,000 account for 0.3% of the total retail loan book size at an industry level. Even though delinquencies on small-ticket personal loans have a marginal impact on the personal loan portfolio, these need to be monitored closely, especially because consumers may prioritize other payment obligations ahead of personal loan payments, which in turn may be a wider indicator of financial stress, the credit bureau report said.

The credit industry landscape has changed significantly over the last four years. Since January 2022, small-ticket personal loans of less than Rs 50,000, while representing a very small share of total retail balances, have accounted for approximately 25% of total origination volumes. As a result, the proportion of credit active consumers availing small-ticket personal loans has increased to 8% in June 2023, from 3% in June 2019.“The marked increase in the volume of consumption loans along with velocity indicates a clear call for lenders to monitor vintage delinquencies closely. Strong underwriting process, focused regularmonitoring of consumer behavior, and robust credit risk management practices are essential if these opportunities are to be nurtured for long-term profitable growth,” said Rajesh Kumar, MD and CEO of TransUnion Cibil.

Lenders are also going slow on lending to new borrowers. Originations among younger consumers (18-30 years) remained steady year-on-year, while those for new-to-credit consumers decreased by 4%.

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