Traditional non-bank finance companies (NBFCs), operating through the brick-and-mortar model as well as fintechs extending unsecured business loans (UBLs), are showing signs of increase in their delinquency levels, according to India Rating and Research (Ind-Ra).
The UBL segment has started showing early signs of stress in asset quality, possibly due to the increasing competitive intensity among lenders, continuing pressure on cash flows in certain end-borrower segments, on-field attrition, lower-than-expected recoveries leading to higher write-offs and over-leveraging of borrowers, said Karan Gupta, Head and Director Financial Institutions, Ind-Ra.
The agency noted that the growth in asset under management (AUM) has slowed down in the UBL space because of the caution exercised by lenders (both on and off-book) and conservatism practiced by them since they are seeing stress building up.
“This can affect the top line since fintechs make substantial profits on new originations and lending partners would exercise caution in growing the book. There also could be seasoning-led credit cost spikes as growth moderates for the fintechs extending UBLs,” Ind-Ra said.
NBFC and fintech business models are designed to offer UBLs to micro enterprises in ticket sizes of up to ₹10 lakh at yields upwards of 25 per centrate of 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.
In-Ra, in a report, noted that while the denominator effect was playing out over most of FY24, the need to recognise the rising delinquencies, provide for them and write-off the same has increased the credit cost pain since Q4 FY24.
With the near-term profitability taking a hit, the agency said it is closely monitoring the developments in the sector and believes that the situation is still not alarming as leverage is at reasonable levels (Q1 FY25: 3.1x; FY24: 2.9x; FY23: 2.8x).
The agency opined that owing to the pent-up demand post COVID-19, micro-enterprises have benefitted from a higher order flow which had led them to borrow more for working capital requirements in FY23 and FY24.
With on-ground demand now plateauing, the added expansionary business cost and rising competition have started to bite into the margins of micro-enterprises, leading to cashflow challenges.
This has led to a rise in delinquencies to a certain extent, the agency said.
