Asset Quality of MFI, Vehicle & Small Business Loans Could Weaken: Moody’s Ratings
Unsecured loans have grown rapidly in recent years amid fierce competition among lenders looking to capitalize on their high yields — Moody’s
MUMBAI: International Rating agency Moody’s on Tuesday said that it expects impairments of unsecured retail loans, including microfinance loans for low-income households to remain at a high level in the next few quarters which would particularly impact small private sector banks. Besides, it also expects asset quality to weaken for two-wheeler loans and small businesses even as it expects the systemwide non-performing loan ratio to remain at 2-3 per cent in the next 12 months, compared to 2.5 per cent at the end of December 2024.
Unsecured loans have grown rapidly in recent years amid fierce competition among lenders looking to capitalize on their high yields.
This has increased leverage among the holders of those loans. Stress is greater for holders of small-sized loans, subprime borrowers or low-income earners. Microfinance loan providers are cleaning up their loan books through write- offs and by curtailing borrower leverage by capping the maximum number of lenders each customer can borrow from at three.
They are also limiting the amount of unsecured debt per borrower at Rs two lakh. Leverage has also increased among holders of gold loans but losses from them will be limited because they are collateralized, said the rating agency.
Among the secured retail loans, the rating agency expects the quality of vehicle loans to weaken in some pockets as pent-up demand for vehicles that was built up during the coronavirus pandemic dissipates, leading to a slowdown in sales growth and as loans age.
“Particularly, delinquencies have increased for loans for two wheelers, which are more vulnerable than those for passenger or commercial four-wheeled vehicles, as younger borrowers with lower
income and nascent credit habits account for a large proportion for the former type. Also, a large share of users of two-wheeler loans are new to credit. Yet two-wheeler loans are a small part of overall vehicle loans systemwide,” said Moody’s.
Small businesses which account for a combined 46 per cent of India's total exports in fiscal 2023-24, may face challenges if trade tensions escalate, raising asset quality risks for banks. Loans to this group of businesses has been growing faster than those to large corporates
in past few years.
Moody’s Ratings however maintained that despite the trade tensions that pose risks for the global economy, the Indian banking sector will be able to broadly preserve asset quality as domestic economic conditions remain supportive for growth, although the divergence of loan performance will remain across different product types and lenders.
