Surge In Retail Loan Defaults Pose A Risk To Indian Economy

These concerns became more pronounced after lenders such as IndusInd Bank and Kotak Mahindra Bank found elevated stress in unsecured loans during the recent earnings revealed

Personal loan growth slumped to 14 per cent in August from over 30 per cent seen in the same period a year earlier

Source : Fibe

Retail loan defaults have been on the rise in India as aggressive lending practices impact the credit situation in the economy. Analysts are worried that this trend could spill over into the broader economy.

These concerns became more pronounced after lenders such as IndusInd Bank and Kotak Mahindra Bank found elevated stress in unsecured loans during the recent earnings revealed, reported Business Standard.

The report noted that personal loan growth is easing after the Reserve Bank of India (RBI) last year placed restrictions on risky lending practices after credit surged in the post-pandemic world. The impact of these decisions has been felt in the market and company earnings, indicating more concerns for the economy’s growth. 

Notably, personal loan growth eased to 14 per cent in August from over 30 per cent seen in the same period a year earlier. Ujjivan Small Finance Bank Ltd and IIFL Finance Ltd in their earnings calls last month warned that anticipate the challenges to continue in the upcoming quarters.

A decline in personal loans also impacts demand from consumers for larger purchases like cars. This was seen in the latest earnings revealed by several automakers which showed a poor performance in the sector in October.

Last year, the central bank asked lenders to set aside more capital towards unsecured consumer credit such as small loans, as the regulators became more concerned about borrowers spending on items beyond their affordability. The elevated cost of loans along with collection disruptions during the election season between April and June this year resulted in a spring of delinquencies.

As a result, microfinance lenders like Fusion Finance, and private players such as Arohan Financial Services Pvt are feeling the pressure. The former saw a decline of over 60 per cent in its shares in the year so far, while the latter has delayed its maiden offering.