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Context:
The securitised asset pool is facing stress due to declining collections in collateral-free credit segments such as personal loans, microfinance, and small business loans, according to a report by ICRA.
Key Findings from ICRA’s Report
A. Decline in Collection Efficiency
- Microfinance loans: Collection efficiency dropped from 97% at the beginning of FY25 to 90% in Q3 FY25.
- Unsecured SME & Personal Loans: Collections have also weakened due to slow economic activity and overleveraging of borrowers.
B. Performance of Secured Loan Pools
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- Housing Loans & Loans Against Property: Collection rates remain steady due to the critical nature of collateral and digital payment adoption.
- Vehicle Loans: Marginal decline in Q3 FY25, but still stable.
- Secured SME Loans: Collection efficiency in the range of 91% to 104% in the first nine months of FY25.
Causes for Concern
- Economic Slowdown: A decline in business activity is affecting borrowers’ ability to repay loans.
- Overleveraging of Borrowers: Many borrowers have taken multiple loans, increasing default risks.
- Upcoming Regulations: Stricter microfinance lending norms from April 2025 may limit disbursements, increasing stress on highly leveraged borrowers.
Credit Risk Outlook
- Unsecured Loan Pools: High risk due to falling collections and borrower distress.
- Secured Loan Pools: Better performance due to collateral backing and digital collections.
- Microfinance Loans: Signs of improvement from December 2024, but further stress expected in Q1 FY26 due to stricter regulations.
The declining collection efficiency in unsecured loans poses a challenge for financial institutions and securitisation investors. Secured loans remain stable, but microfinance and small business loans may face further stress as new regulations take effect.
