Indian economy at risk of retail small-loan defaults


Personal-loan growth is moderating as the central bank last year clamped down on risky lending practices following a post-pandemic surge in credit. — Bloomberg

NEW DELHI: A rise in retail-loan defaults in India due to aggressive lending practices is reverberating in the stock market, with analysts worrying about possible spillover into the broader economy.

Concerns are mounting after lenders including Kotak Mahindra Bank Ltd and IndusInd Bank Ltd reported elevated stress in unsecured loans during second-quarter earnings, sending shares sliding.

The pain is more acute in firms like Ujjivan Small Finance Bank Ltd that focus on smaller-ticket loans, with the stock down more than 30% this year.

Personal-loan growth is moderating as the central bank last year clamped down on risky lending practices following a post-pandemic surge in credit.

The impact is trickling into the market and company earnings, signalling more pain ahead for the world’s fastest-growing major economy.

“The issue will continue for at least the next two quarters and slippages and credit costs will remain high,” said Anand Rathi Securities analyst Yuvra Choudhary.

“If the demand for these loans doesn’t pick up in the festive season, the stress can last much longer.”

Choudhary is underweight on the space.

Last November, the Reserve Bank of India (RBI) asked banks to set aside more capital for unsecured consumer credit, including small loans, as regulators grew concerned about borrowers buying items they could not afford.

The increased cost of loans coupled with collection disruptions during the federal elections between April and June spurred a string of delinquencies.

In August, personal loan growth slowed to 14% from over 30% in the year-ago period.

Ujjivan Small Finance Bank Ltd and IIFL Finance Ltd warned in earnings calls last month they expect the challenging situation to continue in the coming quarters.

Traders have already headed for the exit.

Shares of microfinance lenders such as Fusion Finance Ltd and Spandana Sphoorty Financial Ltd are down more than 60% so far this year, in contrast to a 15% gain in the BSE 500 over the period.

Private players have seen an impact too. Arohan Financial Services Pvt, which provides loans primarily to financially underserved women, is delaying an initial public offering.

This followed an RBI order last month asking a group of shadow lenders to stop sanctioning new loans because of the high interest rates they charge customers.

A slowdown in loans also translates to waning demand from consumers for large ticket purchases like cars.

Disappointing earnings at several automakers put the sector among the worst-performing in October.

Shares of consumer bellwether Hindustan Unilever and retail-chain Avenue Supermarts also plunged on similar concerns following the second-quarter results.

“Consumption has suffered from a clear policy tilt toward infra-led growth,” said Emkay Global Financial Services chief economist Madhavi Arora.

The defaults are gaining pace amid slowing wage growth in urban areas, while rural wages haven’t picked up meaningfully, she added.

“Discretionary spending will definitely be affected.” — Bloomberg

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