Collection Efficiency in Unsecured Asset Classes Under Pressure Says ICRA
Microfinance, personal loans, and unsecured SME loans see declining collection efficiency due to overleveraging and reduced economic activity.
Mumbai: The collection efficiency trend for unsecured asset classes, such as microfinance loans, personal loans and unsecured SME loans, has seen weakening performance in the last few months due to a slowdown in economic activities, coupled with overleveraging of borrowers, rating agency ICRA said on Thursday.
The microfinance pools' collections dropped to 90 percent in Q3 2024-25 from their previous high of 97 percent at the beginning of the financial year. Collections in the SME segment also weakened in 2024-25, especially in the unsecured asset class, where efficiency
ranged between 85-92 percent in the first nine months of 2024-25. For personal loans, the collections have seen a slight downward trend in the past two quarters due to higher festive season spending by the customers and the relatively low priority of personal loans repayment, being unsecured in nature. The collection efficiency reduced to 88 per cent in December 2024 from 92 per cent seen in March 2024 in ICRA-rated pools.
The secured SME pools, however, continue to report robust asset quality with collection efficiency above 95 per cent.
Abhishek Dafria, Senior Vice President and Group Head - Structured Finance Ratings at ICRA, said, “Post the Covid-19 pandemic, the country witnessed a period of high economic growth and healthy performance in lenders’ loan books. This led to securitised pools also showing increased collections and low delinquencies. However, the current fiscal year has seen headwinds across all asset classes, but primarily in the unsecured asset classes, which are facing more pressure in terms of asset quality.”
“Collection efficiency of pools backed by microfinance, unsecured SME and personal loans has seen a decline, although the impact is lower than that seen in the overall portfolios of such originators. This once again highlights the safety of securitised pools as they consist of cherry-picked borrowers with better repayment track records and lower propensity to default,” added Dafria.
Securitisation refers to the process of pooling financial assets together to create new securities that can be marketed and sold to investors. These pooled financial assets generally consist of different kinds of loans, but any type of asset can be securitized.