Synopsis: Over 25% of overdue personal loan (PL) and credit card (CC) customers also hold other retail loans. 85% of defaults in auto and two-wheeler loans are linked to prior defaults in unsecured loans. Borrowers earning less than ₹0.5 million annually hold 18% of retail loans, with over 40% being unsecured, amounting to ₹5 trillion. States like Uttar Pradesh, Kerala, Odisha, and Maharashtra show elevated retail loan delinquencies. Non-banking financial companies (NBFCs) face greater contagion risk compared to private banks.
The issue of contagion risk in retail loans has become a significant concern as defaults in unsecured segments, such as personal loans and credit cards, spill over into other categories like housing, auto, and two-wheeler loans.
According to a report by Elara Securities India, over 25% of overdue personal loan and credit card borrowers also hold other retail loans, making them vulnerable to broader financial stress.
A staggering 85% of defaults in auto and two-wheeler loans stem from earlier unsecured loan defaults, emphasizing the domino effect within retail lending.
This issue is particularly prevalent among borrowers with annual incomes below ₹0.5 million, who account for 18% of retail loans.
Over 40% of these loans are unsecured, amounting to ₹5 trillion or 25% of the unsecured retail portfolio.
Unsecured Loans and Borrower Profiles:
Low-income borrowers primarily rely on unsecured personal loans, unlike their higher-income counterparts, who tend to opt for secured loans.
Microfinance (MFI) borrowers, often overlapping with retail loan segments, are also highly prone to delinquencies.
The portfolio-at-risk (PAR) for retail loans availed by MFI borrowers stands at 10.9% in the 31-180 days past due category, nearly double the rate for borrowers with only MFI loans (5.3%).
Regional and Segment-Specific Trends:
Geographically, states such as Uttar Pradesh, Kerala, Odisha, and Maharashtra show higher levels of overdue retail portfolios.
Among retail loans availed by MFI borrowers, segments like gold, housing, and auto loans report elevated delinquency rates.
The rising ticket size of gold loans, which constitutes 19.5% of the portfolio, requires close monitoring as it could signal potential stress points.
NBFCs vs. Private Banks:
The report highlights that the contagion risk is more pronounced for NBFCs than for private banks.
Roll-forward rates in retail portfolios are increasing, while roll-back rates are declining, signalling growing stress levels.
Contrary to popular belief, delinquencies are higher among borrowers with fewer lenders, debunking the idea that borrowers with multiple lenders are at the core of the stress.
