Delve into the fascinating world of unsecured loans! ICRA data unveils the driving forces behind this mesmerising surge. Get ready to unlock the mystery!
Let’s start our Monday morning with some insightful data on credit products. According to Economic Times, all credit products have witnessed an impressive surge except for mortgage loans, with double-digit growth rates ranging from 14% to 38% across various product categories.
The real showstopper, however, is the unsecured retail loans category, which has experienced impressive growth in the past few years. Hence, ICRA has also revised and increased its growth forecast.
Let’s dive deeper into the reasons behind this unprecedented growth in unsecured loans and the potential opportunities and challenges for NBFCs.
What’s Happening?
According to Economic Times, the unsecured loans segment has skyrocketed! It has seen an impressive Compound Annual Growth Rate (CAGR) of 47% from March 2021 to March 2023.
Given the extraordinary growth of unsecured retail loans, it comes as no surprise that the rating agency ICRA has revised its growth forecast for non-banking finance companies (NBFCs) to a promising 18% to 20%, up from the earlier projection of 12% to 14%. The driving force behind this optimistic outlook lies in the surging demand for unsecured retail loans, signalling a significant shift in consumer preferences.
Why Are Unsecured Retail Loans Surging?
According to the Credit Market Indicator (CMI) report by TransUnion CIBIL, the surge in unsecured retail loans like personal and consumption loans, small enterprise loans, etc., is because of the growing popularity of sachet sized financial products, which offer smaller loans of less than Rs 50,000.
These bite-sized loans have become popular because they are affordable and easily accessible, particularly among younger consumers in semi-urban and rural areas.
In the past, new-to-credit (NTC) or people new to loans faced challenges in obtaining credit, as most lending companies cautiously approached them. However, with the emergence of these smaller ticket-sized loan products, more lenders are now willing to cater to this segment.
The approval rates for NTC consumers have significantly improved, decreasing from 34% in March 2020 and 28% in March 2021 to 23% in the quarter ending March 2023.
What’s Next?
Based on the ICRA report, it is anticipated that the rise in interest rates may exert margin pressures on NBFCs during the current fiscal period, especially for those with a significant portion of fixed-rate loans, which could impact their return on assets. Additionally, according to the TransUnion CIBIL report mentioned in Moneycontrol, the number of unsecured loan payment defaulters in India has risen to 32.9% in the personal loans segment as of April 21, 2023, compared to 31.4% from a year earlier.
Going forward, NBFCs will have to strike a balance between the need to adopt a cautious approach and prioritise responsible lending practices.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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