Spillover From Overleveraging Of Unsecured Loan Borrowers By NBFCs To Banks Maybe Limited, Says ICRA

The spillover effect from overleveraging of unsecured loan borrowers from the non-banking financial space to the banking sector is likely to be limited, ICRA Limited said in a media roundtable on Thursday.

"While banks will also see stress from the overleveraging of borrowers through NBFCs, that proportion is insignificant to the overall bank’s balance sheet and capital," Karthik Srinivasan, group head financial sector ratings at ICRA, said.

According to him, borrowers from the banking channel would be in the upper strata as compared with that of NBFCs.

Banks will also not be immune to overleveraging, but they will feel as much pain as NBFCs that specifically operate in those segments.

It is also noteworthy that the income levels of the borrower have not increased in the same fashion as the growth rate of these unsecured loans, he said.

There has been high growth, and the slowdown will have its ramifications, which the rating agency is building in. "The overall component of these loans, which are less than Rs 100,000, is not very significant," he said.

Historically, what has been the case is that spillover of stress in NBFCs to the banking sector only happens when there is divergence of funds.

"We are expecting that the companies will be able to absorb loan loss provisions through their operating profits and capital buffers that are good," Anil Gupta, senior vice president and co-group head financial sector ratings at ICRA, said.

"Unless you doubt the process, systems, or loan book of that NBFC, it is unlikely to have a spillover," Gupta said.

What will be key monitorable would be the spillover of stress from unsecured segments to secured segments having similar borrower profiles, the rating agency said.

Overall, ICRA expects banking sector credit growth to moderate to 12% on year from 16.3% in the current financial year.

It also expects assets under management of NBFCs to see moderation in growth to 16-18% in 2024-25 (Apr-Mar) from 25% a year ago, led by a slew of regulatory actions.

The recent regulatory actions on certain entities are expected to push others to adjust their business practices and models, which shall also have a bearing on near-term growth, the rating agency said.n