Stability and Performance of Unsecured Loans Probable to Fall in FY22

We know that life has changed post the spread of the deadly pandemic, and things have never gotten the same since then. There has been a huge impact on the financial lives of people at every level. The same has impacted the performance of loans in the country.

Recently, India Ratings and Research (Ind-Ra) has published the FY22 Structured Finance Outlook that speaks of microfinance performance, secured, and unsecured loans, as applicable to both businesses and consumers. 

There has been an economic recovery lately, with all the consumer activities falling into place slowly, thanks to the success of the COVID-19 vaccination drive in India. The shift in investment priorities and consumption behaviour are expected to bring the default rates of secured loans to pre-pandemic levels.

In contrast, the condition of unsecured asset classes, such as microfinance and unsecured business and consumer loans, is mostly worsening due to the borrowers’ depleting financial conditions and the nature of these loans. The Reserve Bank of India (RBI) could delay the stress in these segments. But the delinquencies in these segments are not yet stabilised, and higher loan losses are expected to surface in FY22. 

According to the agency, recovery momentum and continued policy support are key for improving the loan performance in FY22. The borrowers of these loans are mostly small and medium enterprises and small and medium-income households. These are the sections of the society that have received a severe hit from the pandemic. The government support schemes are crucial to improve their financial positions.

Though India has sustained the number of COVID-19 cases till February 2021, the numbers seen in March 2021 create the scare of the second wave. Though vaccination is effective enough in India, the chances of a new variant of the virus outbreaking that is immune to the vaccine are worth considering. In this case, the government’s ability to contain the virus without affecting the economy is a key factor in predicting the country’s near future.

The report stated that the vehicle loans, including the commercial ones, have a stable performance outlook due to the pickup in economic activities as seen in the second half of FY21. It said that small business loans might have a differentiated performance based on the loan type. Due to the borrower’s higher propensity to repay, secured business loans (mostly loans against property) have a stable performance outlook it mentioned.

As per the report, digital initiatives are expected to improve portfolio monitoring and reducing delinquencies. This is because the focus will now be on building quality secured loan portfolios, increasing process efficiency, and automating customer follow-ups. 

Counterparty-related stress has been the cause of affecting the ratings of securitisation transactions. The agency shares its opinion that timely servicer replacement on credit migration inline with transaction documents can bring stability in rating for securitisation transactions.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in